Better earnings ahead for steel firms

Rising international prices should lead to better profitability, driving up earnings

The share price of steel majors such as Tata Steel and JSW Steel hit new 52-week highs on Monday, and a key reason for that was prices of hot rolled (HR) steel crossing $600 per tonne last Friday and trading firm in China. If experts are to be believed, there is more room for upside in their stock prices as well as earnings. 

Rising global steel prices would benefit international operations of players such as Tata Steel, and also improve the potential for exports of all companies. JSW Steel, however, remains the most flexible one, due to its proximity to ports in terms of tapping the export opportunity, analysts said. Jindal Steel and Power (JSPL), too, has benefitted from increasing exports of value-added steel products, one of the drivers of the company’s strong turnaround in profitability. SAIL, too, is continuing to explore opportunities to ramp up its exports. 

Per tonne HR steel prices in China dipped to $420 levels in the June quarter (Q1), but have rebounded to $613 levels as of Friday. This rebound is driving benefits for Indian steel players as well. While Q1 had seen a correction in international steel prices, the domestic market, too, was not supportive due to goods and service tax (GST)-related de-stocking, which impacted the sequential performances of domestic firms. With the rebound in international prices, domestic steel prices are already up by Rs 2,000-3,000 a tonne in July-August. 

In fact, PhillipCapital’s channel checks and interaction with flat-steel dealers indicate steel prices could increase by another Rs 2,000-2,500 per tonne over the September-October period.

Higher steel prices apart, strong export bookings with steel producers will drive realisation over the next couple of months, analysts said. With GST-led cautious sentiments behind and given the production disruptions at companies under bankruptcy, there are expectations of much higher prices led by recovering demand.

Better realisations will also take care of rising coal and iron ore costs, which have been pushing up overall costs for companies. For instance, JSW Steel had seen a 24 per cent year-on-year rise in power and fuel costs in Q1, while cost of raw material consumed had gone up by 55 per cent. Better realisations can drive profitability and earnings of these companies. The pace of increase in steel prices is a welcome surprise and if it sustains, there could be further earnings upgrades after Q2 results, Dhawal Doshi at PhillipCapital said.

For Tata Steel, the improving outlook for its European operations adds to the good prospects in domestic business. For JSW Steel, better pricing and margin visibility and ongoing expansions have kept analysts positive. For JSPL, volumes are expected to double by FY18-end (aided by new capacity) and firm demand and price outlook bodes well. Better realisations can also help SAIL manage high costs, which has been a major concern.