to revive the earnings sanity; sector outlook upgraded to Neutral February 08, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Title 110 100 90 80 70 60 Feb 15 Apr 15 Source: Bloomberg PL Steel Index Jun 15 Aug 15 Oct 15 Sensex Dec 15 Feb 16 In a major relief to the steel sector, Govt imposed the much awaited Minimum Import Price () on steel imports covering the products in an exhaustive manner. The notification covers over 90% of the total steel imports with price (CIF) in the range of US$445 750/t (on finished products). With the, imports would become expensive by 26 70% or USD110 270/t. However, we build in total hike of US$60 (Rs4000/t) or 17% over current HRC price of USD358 as we believe that poor profitability of user industry, overcapacity in the sector (around 13m tonnes of supplies just added) and shift of steel product imports to finished products would limit the increase in prices despite the stop of imports. In the wake of this bold trade action and strong likelihood of continuity of the similar restrictions through anti dumping, we upgrade our outlook on the sector from Underweight to Neutral. to provide steel sector the breather till release of protection under Antidumping: We expect that industry would file the application for anti dumping by late February or beginning of March 2016. Given the cumbersome process involved in verification of application and award of decision in anti dumping, would give major relief to the sector in the interim. Development of parallel market not a major risk: Based on the notified price, imports of Hot Rolled coils (HRC)/Cold rolled Coils (CRC)/Plates/Rebar/Wire rod would become expensive by 26%/58%/70%/56% or US$110/235/240/205/180. There is a possibility of circumventing this through over invoicing or sourcing through overseas subsidiaries. However, we believe that continuous monitoring by Govt and competitive pricing by industry would dissuade any such practices to emerge and succeed. Sector Update Stock Performance (%) 1M 6M 12M Sensex (1.3) (12.8) (14.3) PL Steel Index (7.3) (11.7) (31.2) JSPL (24.9) (19.2) (55.3) JSW Steel (0.4) 12.4 7.9 SAIL (13.8) (33.2) (44.5) Tata Steel (7.8) (10.8) (36.6) Sanity to return in earnings; upgrade JSW steel (JSTL) to BUY and Jindal Steel (JSP) to Accumulate: Among our coverage universe, we upgrade the rating on Jindal steel (JSP) to Accumulate from Reduce on account of expected higher utilisations (due to lower imports), improved operations at Angul and attractive valuations. We also upgrade JSW steel (JSTL) to BUY from Accumulate on the back of its efficient operations and direct play on trade action. While we continue to maintain our Reduce rating on Tata steel due to continued weakness in European operations and expensive valuations on revised earnings. Our rating on SAIL remains unchanged with Reduce as its uncompetitive operations and expensive valuations leave no scope for meaningful return potential. Exhibit 1: Valuation matrix EBITDA (Rs m) EPS (Rs) PE (x) P/BV (x) EV/EBITDA (x) Company Name Rating CMP (Rs) TP (Rs) E FY18E E FY18E E FY18E E FY18E E FY18E Jindal Steel & Power Acc 64 80 73,724 80,744 17.7 27.5 3.6 2.3 0.3 0.2 6.9 6.2 JSW Steel BUY 1,037 1,350 117,239 127,104 120.3 143.2 8.6 7.2 1.0 0.9 5.3 4.5 Steel Authority of India Reduce 41 40 52,704 65,183 2.7 4.6 15.2 8.9 0.4 0.4 10.2 8.8 Tata Steel Reduce 234 220 152,951 168,788 37.7 46.5 6.2 5.0 0.7 0.6 6.5 6.1 Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
JSW steel Upgraded to BUY with TP of Rs1350 We have revised our realization estimates for /FY18 by 6% to Rs32,653. Volume estimate for is increased by 1.5% to 15.1m tonnes. Hence, revenue estimates for /FY18 are increased by 6.7% to Rs556bn. EBITDA/t estimate for is increased by 25% to Rs6,597, EBITDA estimates for are revised upward by 22% to Rs117bn and PAT estimate is revised by 97% to Rs29.1bn. Exhibit 2: EBITDA/EPS estimates revised upward by 23%/97% for Revenue (Rs m) 521,172 556,124 6.7 EBITDA (Rs m) 96,176 117,239 21.9 PAT (Rs m) 14,788 29,076 96.6 EPS (Rs) 61.2 120.3 96.6 Volumes (m tonnes) 14.9 15.1 1.5 Realisation (Rs/t) 30,841 32,653 5.9 EBITDA per tonne (Rs/t) 5,280 6,597 25.0 Source: PL Research, Company Data We upgrade our target price on the stock to Rs1350 (earlier TP of Rs1074), EV/EBTIDA of 6x EV/EBITDA. Tata Steel Maintain Reduce with TP of Rs220 We revised our realisation estimates of domestic operations for by 6% to Rs32,653 while volume estimate remain unchanged at 11m tonnes. Hence, consolidated revenue estimates for are increased by 2.3% to Rs1.4 tn. EBITDA/t estimate for domestic operations in is increased by 18% to Rs10,290, EBITDA estimates for are revised upward by 13% to Rs153bn and PAT estimate is increased by 55% to Rs36.7bn. Exhibit 3: EBITDA marginally revised upward by 13% while EPS increased by 55% Revenue (Rs m) 1,379,563 1,411,493 2.3 EBITDA (Rs m) 135,174 152,951 13.2 PAT (Rs m) 23,697 36,661 54.7 EPS (Rs) 24.4 37.7 54.7 Volumes (m tonnes) 11.0 11.0 Realisation (Rs/t) 29,531 31,081 5.2 EBITDA per tonne (Rs/t) 8,730 10,289 17.9 We maintain our Reduce rating with revised target price of Rs220 (earlier TP of Rs180), EV/EBITDA of 6.2x. February 08, 2016 2
SAIL Uncompetitive operations to undo the benefit of We revise our realization estimates for by 1.1% to Rs32,557. Volume estimate for is increased by 2.8% to 15m tonnes. Hence, revenue estimates for are increased by 4% to Rs511bn. EBITDA/t estimate for is increased by 61% to Rs3,508, EBITDA estimates for are revised upward by 66% to Rs53bn and at the net income level, we revise the estimate to a profit of Rs11bn vs previous estimate of a loss of Rs7.5bn. Exhibit 4: EBITDA revised upward by 66% for ; still very expensive Revenue (Rs m) 491,525 510,687 3.9 EBITDA (Rs m) 31,794 52,704 65.8 PAT (Rs m) (7,528) 11,082 EPS (Rs) (1.8) 2.7 Volumes (m tonnes) 14.6 15.0 2.8 Realisation (Rs/t) 32,191 32,557 1.1 EBITDA per tonne (Rs/t) 2,176 3,508 61.2 We maintain our Reduce rating with revised target price of Rs40 (earlier TP of Rs34), EV/EBITDA of 7x. Jindal steel Perfect blend of higher utilisation, improved operations and attractive valuations We revise our realisation estimate for by 5% to Rs31,415. Volume estimates for are increased by 20% to 4.3mt. EBITDA/t estimates for are increased by 44% to Rs12,052 on the back of higher realisations and lower costs. EBITDA estimates for are revised by 43% to Rs74bn, and PAT level, we estimate a net profit of Rs16bn against previous estimates of loss of Rs3.2bn. Exhibit 5: Net likely to turn positive at Rs16bn against prior expected loss of Rs3.2bn Revenue (Rs m) 278,471 304,055 9.2 EBITDA (Rs m) 51,662 73,724 42.7 PAT (Rs m) (3,206) 16,153 EPS (Rs) (3.5) 17.7 Volumes (m tonnes) 3.6 4.3 19.6 Realisation (Rs/t) 29,958 31,415 4.9 EBITDA per tonne (Rs/t) 8,380 12,052 43.8 We upgrade the stock from Reduce to Accumulate with TP of Rs80 (earlier TP of Rs59), EV/EBITDA of 7x. February 08, 2016 3
Exhibit 6: HRC (US$) Imports of HRC(assuming withdrawal of safe guard duty)/crc would become expensive by 26%/58% or US$110/235 Post CRC (US$) Post Chinese FoB 280 450 Chinese FoB 325 550 Freight 20 Freight 20 0 CIF 300 450 CIF 345 550 Basic import duty 38 56 Basic import duty 43 69 Safeguard duty 60 0 Safeguard duty 0 0 Port charges, cutting charges, transport charges 20 20 Port charges, cutting charges, transport charges 7 7 Insurance and financing cost 5 5 Insurance and financing cost 5 8 Total cost 422 531 Total cost 400 634 Delivered HRC price (Rs) 28696 36091 Delivered CRC price (Rs) 27220 43112 Source: DGFT,PL Research, Industry, Bloomberg Exhibit 7: Plates/Rebar s imports would become dearer by 71%/67% or US$239/205 Plates (US$) Post Rebar (US$) Post Chinese FoB 270 500 Chinese FoB 250 455 Freight 20 0 Freight 20 0 CIF 290 500 CIF 270 455 Basic import duty 36 63 Basic import duty 27 46 Safeguard duty 0 0 Safeguard duty 0 0 Port charges, cutting charges, transport charges 7 7 Port charges, cutting charges, transport charges 7 7 Insurance and financing cost 4 8 Insurance and financing cost 4 7 Total cost 338 577 Total cost 308 514 Delivered Plates price (Rs) 22957 39236 Delivered Rebar price (Rs) 20947 34974 Source: DGFT,PL Research, Industry, Bloomberg Exhibit 8: Wire rod/galvanised sheet s imports cost to rise by 56%/56% or US$185/265 Wire Rod (US$) Post Galvanized steel (hot dipped) (US$) Post Chinese FoB 270 455 Chinese FoB 390 643 Freight 20 0 Freight 20 0 CIF 290 455 CIF 410 643 Basic import duty 29 46 Basic import duty 51 80 Safeguard duty 0 0 Safeguard duty 0 0 Port charges, cutting charges, transport charges 7 7 Port charges, cutting charges, transport charges 7 7 Insurance and financing cost 4 7 Insurance and financing cost 6 10 Total cost 330 514 Total cost 474 740 Delivered Wire Rod price (Rs) 22464 34974 Delivered Galvanized steel (hot dipped) (Rs) 32259 50321 Source: DGFT,PL Research, Industry, Bloomberg February 08, 2016 4
Exhibit 9: HSC code Notification covers over 90% of the total steel imports with price (CIF) in the range of US$445 750/t (on finished products) Name of product FY15 000 tonnes Apr Nov'15 000 tonnes Price (US$) % of Total Imports 72083990 OTHR FLAT ROLD PRDCTS IN COILS OF A THCKNS< 3 MM HOT RLD,EXCL.PICKL 430.1 851.4 500 11.7 72253090 OTHER HOT ROLLED PRODUCTS IN COILS 827.7 735.8 445 10.1 72279090 OTHER BARS AND RODS,HT RLLD IN IRREGURARLY WOUND COILS OF OTHR ALLOY STEEL 757.2 573.9 455 7.9 72083890 OTHR FLAT ROLD PRDCTS IN COILS OF A THCKNS>=3 BUT< 4.75MM HOT RLD,EXCL.PICKL 419.9 536.0 500 7.4 72085110 PLATES OF FLAT ROLD PRDCTS NOT IN COILS OFTHCKNS EXCD 10 MM HOT RLD PICKLD 373.3 409.2 500 5.6 72071290 OTHERS 342.0 367.3 5.0 72091790 OTHR FLT RLD PRDCTS IN COILS NT FRTHR WRKD THN COLD RLD OF THCKNS>=0.5MM BUT<1MM 447.2 307.3 560 4.2 72107000 PRDCTS PAINTD,VRNSHD/COATD WTH PLSTCS 284.3 293.7 752 4.0 72083790 OTHR FLAT ROLD PRDCTS IN COILS OF A THCKNS>=4.75 BUT< 10MM HOT RLD,EXCL.PICKL 145.9 249.4 500 3.4 72104900 OTHR PRDCTS OF IRON/NON ALLOY STEEL OTHERWISE PLTD/COTD WTH ZINC 279.6 201.4 643 2.8 72091690 OTHR FLT RLD PRDCTS IN COILS NT FRTHR WRKD THN COLD RLD OF THCKNS >1MM BUT <3MM 271.8 193.2 560 2.6 72254019 OTHER QULTY OF THCKNS>4.75 MM 668.3 182.3 500 2.5 72083930 SHEETS OF FLAT ROLD PRDCTS IN COILS OF A THCKNS< 3 MM HOT RLD,EXCL.PICKL 72.8 175.8 445 2.4 72083690 OTHR FLAT ROLD PRDCTS IN COILS OF A THCKNS< 10MM HOT ROLD,EXCL. PICKLD 63.2 173.9 500 2.4 72083940 STRIPS OF FLAT ROLD PRDCTS IN COILS OF A THCKNS< 3 MM HOT RLD,EXCL.PICKL 301.6 166.8 445 2.3 OTHR FLT RLD PRDCTS OF IRON/NON ALOY STL CLAD,PLTD OR COTD,OF 72109090 122.4 152.1 752 2.1 WDTH>=600MM N.E.S. 72142090 OTHERS 136.6 145.0 451 2.0 72099000 OTHER FLAT ROLLED PRODUCTS N.E.S. 263.5 123.6 560 1.7 72089000 OTHR FLAT ROLLED PRODUCTS, N.E.S. 274.4 114.9 500 1.6 72255010 COLD ROLLED,OF THCKNS <3MM 147.0 101.3 560 1.4 SHEETS OF FLT RLD PRDCTS IN COILS NT FRTHRWRKD THN COLD RLD OF THCKNS 72091620 72.1 99.3 560 1.4 >1MM BUT <3MM 72082790 OTHR FLAT ROLD PRDCTS IN COILS OF A THCKNS< 3MM HOT ROLD,PICKLD 66.3 79.9 500 1.1 72249091 STEEL BILLETS 140.9 77.4 1.1 72103090 OTHR FLT ROLD PRDCTS OF IRON/NON ALOY STL ELETRCLY PLTD/COTD WTH ZINC OF A WDTH OF 600 MM OR MORE,CLAD,PLTD/CO 77.4 74.1 643 1.0 72091890 OTHR FLT RLD PRDCTS IN COILS NT FRTHR WRKD THN COLD RLD OF THCKNS < 0.5MM 55.9 73.7 560 1.0 72071920 MILD STEEL (M.S.) BILLETS 5.6 57.8 0.8 72085190 OTHR FLAT ROLD PRDCTS NOT IN COILS OF THCKNS EXCD 10 MM HOT RLD PICKLD 20.9 50.7 500 0.7 72091720 SHEETS OF FLT RLD PRDCTS IN COILS NT FRTHRWRKD THN COLD RLD OF THCKNS>=0.5MM BUT<1MM 94.1 49.1 560 0.7 72105000 PRDCTS PLTD/COATD WTH CHROMIUM OXIDES OR WITH CHROMIUM AND CHROMIUM OXIDE 56.7 45.8 643 0.6 72254013 HIGH TENSILE QULTY OF THCKNS>4.75 MM 84.0 37.2 500 0.5 72082690 OTHR FLAT ROLD PRDCTS IN COILS OF A THCKNS>= 3MM BUT < 4.75MM HOT ROLD,PICKLD 20.8 34.7 500 0.5 Source: DGFT, PL Research February 08, 2016 5
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