[T.S.R:14694] Sector Update - Steel

 

Steel: Cutting EPS estimates

 

Motilal Oswal

18 June 2010

Early recovery in steel prices unlikely, cost increases more certain

- Mounting inventories at the producers' end have dashed all hopes of an early recovery in steel prices. Steel producers, who held on to prices in April and May in the hope that prices would recover on the back of rising costs, have lost market share to traders, who cut prices in line with the changing market reality. With diminishing hope of an early recovery in prices, given continued production growth in China, steel producers around the world have also begun cutting prices since the beginning of June. However cost increases are more certain due to recently negotiated quarterly prices of iron ore and coking coal.

- Squeezed by price cuts and cost pressure, steel producers are likely to witness margin contraction. In 1QFY11, margins would be hit the hardest for SAIL, followed by JSW Steel and Tata Steel India. There would be a bigger drop in margins in 2QFY11.

SAIL: We expect FY11 EPS to decline 22% to Rs12.8 v/s our old estimate of Rs17.2 – a cut of 26%. The stock appears expensive at 15.5x FY11E EPS and an EV of 10.2x FY11E EBITDA. Maintain Neutral.

JSW Steel: The stock is expensive based on our revised FY11 estimates, but appears attractive based on FY12 estimates due to large volume growth. Maintain Buy

Tata Steel: We are cutting our FY11 EPS estimate by 19% to Rs63.7. The stock is trading at 7.6x FY11E EPS and an EV of 6.9x FY11E EBITDA. Maintain

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