Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Valuation Insights and Risk Analysis of Steel Market

Published 05/03/2024, 04:29 PM
JSTL
-
JNSP
-
SAIL
-
TISC
-

In the intricate dance of steel prices and market dynamics, Morgan Stanley (NYSE:MS)'s recent report shines a light on key trends shaping the industry landscape.

Last week witnessed a modest uptick of about 1% in domestic Hot Rolled Coil (HRC) prices, with a month-on-month increase of 2.4%, reaching Rs53,500/t. However, Rebar prices saw a slight decline of 1.4%, possibly due to a post-fiscal year-end demand moderation and the central elections. Meanwhile, China's steel prices experienced a slight dip, potentially influenced by moderation in metallurgical coal prices. The import parity premium remained stable at around 7%.

Global iron ore prices surged in April, recording a remarkable uptick of approximately 13%, further bolstered by optimistic sentiments regarding China's macroeconomic recovery. This surge translated into strength in domestic prices, notably by NMDC (NS:NMDC), which hiked lump and fines prices by Rs400/t and Rs200/t, respectively. Despite this, domestic iron ore prices maintain a significant discount of around 50% compared to global prices.

Metallurgical coal prices remained relatively stagnant throughout April but witnessed a sharp downturn last week, dropping approximately 3.4% WoW (Australia HCC).

Domestic steel spreads exhibited positive trends in April, recording a monthly increase of about 3% and a weekly increase of approximately 2%. However, analysts at Morgan Stanley caution against anticipating significant expansion in the near term, indicating a likely plateau in profitability.

March saw robust demand for finished steel, propelled by seasonal factors and central elections, with a year-on-year increase of about 9%. This demand outpaced supply growth by approximately 7%, resulting in inventory de-stocking. However, inventory levels still remain elevated compared to historical averages, with future trends pivotal in predicting the trajectory of spreads.

Despite steel stocks witnessing a commendable performance over the last six months, outperforming the Sensex by approximately 20 percentage points, Morgan Stanley remains cautious. They argue that the absence of substantial improvements in inventory levels and spreads, and consequently profitability, suggests that the current outperformance may be overstretched. With valuations currently at 1.8x (on a 1-year forward P/B basis) compared to a long-term average of approximately 1x, they anticipate a potential de-rating in the coming months.

As investors, understanding the valuation methodologies and associated risks of steel companies is crucial for making informed decisions. Let's delve into the fair valuation assessment provided by the industry-grade investment tool - InvestingPro coupled with Morgan Stanley’s risk assessment.

Jindal Steel And Power Ltd

Probability-weighted residual income model: The assessment is based on a bull (10%), base (70%), and bear (20%) scenario. The higher weighting on the bear case reflects concerns regarding the medium-term demand/supply dynamics and steel price outlook, with a CoE of 12.5%, terminal ROE of 13%, and terminal growth of 3%.

Image Source: InvestingPro+

Risks to Upside:

- Faster-than-expected improvement in the global macroeconomic environment, leading to higher demand and steel prices.

- Pickup in exports with a significant improvement in global demand.

Risks to Downside:

- Slower domestic steel volume growth.

- Weaker-than-expected profitability due to lower steel prices and higher costs.

- Underperformance in international operations.

JSW Steel (NS:JSTL) Ltd

Similar to JNSP, JSW's valuation utilizes a probability-weighted residual income model with a CoE of 12.0%, terminal ROE of 15%, and terminal growth of 3%.

Image Source: InvestingPro+

Risks to Upside:

- Improvements in domestic demand and company volume growth exceeding expectations, leading to higher steel prices.

- Faster project ramp-up.

Risks to Downside:

- Weaker-than-expected prices/volume momentum.

- Delay in commissioning new capacity.

- Higher-than-expected iron ore costs from auctioned mines.

Steel Authority (NS:SAIL) of India Limited

SAIL's valuation follows a similar approach, with a CoE of 13.1%, terminal ROE of 13%, and terminal growth of 3%.

Image Source: InvestingPro+

Risks to Upside:

- Improvements in domestic demand and company volume growth surpassing expectations.

- Higher-than-expected domestic steel prices.

Risks to Downside:

- Weaker-than-expected prices/volume momentum.

- Faster-than-expected earnings deterioration.

Tata Steel (NS:TISC)

Tata Steel's valuation methodology mirrors that of its counterparts, with a CoE of 13.1%, terminal ROE of 15%, and terminal growth of 3%.

Image Source: InvestingPro+

Risks to Upside:

- Improvement in Indian steel demand growth and recovery in steel prices.

- Faster-than-expected improvement in the global macroeconomic environment, benefiting the European business.

Risks to Downside:

- Sharp correction in international steel prices.

- Deeper-than-expected losses in Europe.

Morgan Stanley's insights provide a comprehensive understanding of the nuanced dynamics at play in the steel market, offering investors valuable guidance in navigating this complex terrain.

To get more insights into valuation, financial health, red flags, etc. subscribe to InvestingPro by clicking here, for just INR 216/month! Avail this limited-time offer today and take your investment journey to the next level for a very affordable price!

X (formerly, Twitter) - Aayush Khanna

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.