Will infrastructure push boost fortunes of steel stocks?

Marginal rise in import duty provides a respite but lower demand and realisation points to dull outlook; yet, analysts positive on JSW & Tata Steel

The infrastructure push provided by the finance minister in the Union Budget could prove beneficial for steel sector companies, under pressure due to muted demand, weak realisation and a sharp increase in imports from Chinese counterparts.

The construction of another 100,000 km of roads and six million houses (by 2022) would definitely boost steel requirement. Still, this remains a longer-term story and will entirely depend at the speed of project implementation. In the near term, however, the outlook remains weak.

HSBC data suggest India’s steel consumption growth for the financial year-to-date has been only up by around two per cent, lower than the average of around eight per cent annually in the past 10 years. And, in the past year, steel imports from China have increased about 200 per cent and overall imports by 60 per cent. Some relief was provided in the Budget through a basic customs duty increase. The tariff on iron and steel was increased from 10 per cent to 15 per cent.

On the flip side, the cost of coal has also been raised. The clean energy cess on coal has increased from Rs 100/tonne to Rs 200/tonne and customs duty for metcoke from 2.5 per cent to five per cent. This has neutralised the benefits for steel producing companies. Analysts at India Infoline, however, believe the government has increased the room to increase customs duty and it would benefit steel manufacturers. Special additional duty on scrap has been reduced from four per cent to two per cent. Rahul Dholam at Angel Broking says this is marginally positive for entities such as Tata Steel and JSW Steel.

The iron ore price cuts, the latest being on Monday, are good news for manufacturers such as JSW, which source the input from the domestic market. NMDC, after cutting prices by Rs 200/300 a tonne for lumps/fines for February, has again reduced prices by Rs 300/500 a tonne for March. Thus, some respite to margins should be provided.

Overall, looking at slow steel demand growth and realisations, analysts believe the near-term outlook remains weak but once infrastructure-related activities pick up and the government takes more steps to curb cheaper imports, companies with a domestic focus as JSW will do well and, thus, remain their best picks.

Tata Steel, too, is seen as a good pick, seeing the benefits it will derive from captive raw materials and expansions in progress. Its international exposure could add to the overall gains. For instance, Tata Steel Europe is doing satisfactorily, after a large number of efficiency initiatives. A weaker euro can help. After the Budget, a majority of analysts have 'Buy' ratings on JSW Steel and Tata Steel.