Steel stocks have been reeling under severe pricing pressures, led by cheaper imports. Over the past one month, stock prices of steel companies have declined up to 9 per cent on the National Stock Exchange (NSE). Investors, however, may use the correction to enter the pack as pricing pressure may be bottoming out, believe analysts.
“In steel or any other commodity, if prices or spreads are nearing their bottom, it can be an opportune time to invest in those stocks. In India, the domestic fundamentals, such as steel consumption, remain robust, hence, one can take fresh positions in these counters,” said Amit Dixit, analyst at ICICI Securities.
The domestic steel spread is down to Rs 24,330 per tonne – lowest since March 2024 and hot rolled coil (HRC) price is down to Rs 51,370 per tonne – lowest since December 2020, the analyst said.
On the bourses, the Nifty Metal index has fallen by 1.01 per cent over the past month, while the NSE Nifty50 has risen by 0.17 per cent, ACE Equity data shows.
Individually, APL Apollo Tubes dropped by 8.89 per cent, Steel Authority of India (SAIL) by 7.4 per cent, NMDC by 3.89 per cent, Jindal Stainless by 2.97 per cent, and Tata Steel by 2.41 per cent in one month.
The weakness, analysts said, followed oversupply from countries like China and Vietnam, which have been dumping their steel produce in the Indian market.
In the first four months of financial 2024-25 (4MFY25), for instance, net steel imports rose 57 per cent year-on-year (Y-o-Y) to 2.7 mega tonnes (mt), while exports fell by 46 per cent Y-o-Y to 1.7mt.
Of this, imports from China rose 193 per cent Y-o-Y during the period to 0.85mt, taking its share in overall imports to 32 per cent from an average of 16 per cent in the past four years. Vietnamese steel imports, on the other hand, were down by 60 per cent Y-o-Y, data by ICICI Securities shows.
To curb this, the Directorate General of Trade Remedies (DGTR), recently, launched an anti-dumping investigation into HRC imports from Vietnam.
The protectionist move, analysts said, is a step in the right direction even as Vietnam represents a smaller piece of the pie.
“The investigations should engulf countries like China, whose share in Indian imports has gone up markedly. Further, there is hardly any export of steel from India to China, thus ruling out any benefit to Indian steel companies,” analysts at ICICI Securities wrote in a report.
According to the brokerage, profitability in China’s HRC and rebar is at their lowest levels in the past 15 years, with HRC at 2.5 per cent and rebar at 0.08 per cent.
Hence, the brokerage said that the exports by China seem to be unfairly priced, unable to cover even the variable cost of production.
Motilal Oswal’s channel checks indicate that while steel prices might remain subdued in the short term, there is potential for improvement in the second half of FY25.
The SC ruling
Meanwhile, the Supreme Court of India, last week, held the state government’s authority to impose additional taxes on minerals, retrospectively, with effect from April 1, 2005.
Analysts, however, expect the verdict’s impact to be minimal as they expect the final cost to be passed on to consumers.
“On a prospective basis, the Jharkhand government recently proposed additional cess of Rs 100 per tonne on coal and Iron ore, and Rs 70 per tonne on Bauxite. Assuming all state governments follow this, incremental impact on companies’ Ebitda shall be 2–3 per cent, which is not alarming,” Ashish Kejriwal and Jyoti Singh of Nuvama Institutional Equities wrote in a report.
Individually, analysts predict steel producer NMDC to witness limited impact of the ruling as it can pass on most of the past liabilities arising from the ruling to consumers due to availability of pass-through clauses on any regulatory cess.
Hindalco, on the flipside, has not received any tax demand yet, whereas the disclosed contingent liability of Tata Steel could include interest and penalties, which are not admissible, analysts at Kotak Institutional Equities pointed out.
“The demand raised by states under different laws could be further litigated based on merits on a case-to-case basis,” it added.
Against this, ICICI Securities has ‘Buy’ recommendations for JSW Steel, Jindal Steel, Jindal Stainless, and Tata Steel, ‘an Add’ call for NMDC, and a ‘Sell’ for SAIL.
Similarly, Motilal Oswal has ‘Buy’ ratings on Jindal Steel, JSW Steel, and NMDC, with a ‘Neutral’ rating on Tata Steel and Vedanta.
First Published: Aug 20 2024 | 12:14 PM IST