Less than a year ago, several brokerages discontinued actively tracking industrial and cyclical stocks as demand weakened and economic growth plummeted to a 10-year low. These sectors are now seeing a revival of interest as the belief is that a combination of global and local factors will see a revival in demand.
According to Credit Suisse, the cyclical defensives price-to-book gap in India is the biggest in the region. While not all cyclicals are showing promise in equal measure, analysts are betting big on steel stocks.
Goldman Sachs initiated coverage of three steel stocks — Tata Steel, JSW Steel and Steel Authority of India — in December as it believes that India will benefit from the improved global steel outlook. The brokerage expects global steel consumption to rise by 4.7 per cent to 1.5 billion tonnes in 2014, driven by rising demand from Europe and China.
There are several domestic as well as global factors that are likely to aid the profitability of select steel players in India. For starters, global steel prices have strengthened through 2013. In the fortnight ending December 30, CIS Black Sea export prices gained 0.9 per cent to $537.5/tonne, while hot rolled sheet prices remained intact at $559/tonne. Long product prices in India also strengthened in December. JSW Steel is expected to raise steel prices by Rs 700-1,000/tonne, claim analysts.
Even though underlying demand in India remains weak, Goutam Chakraborty of Emkay Global believes that a weaker rupee and some supply constraints have helped domestic steel prices. There’s good news even on the raw material side. In the last week of December, 62 per cent grade iron ore prices have dipped and they are unlikely to see an upward movement in 2014.
India is going to turn into a net exporter of steel in FY14 as higher capacity additions and flat demand will force many companies to look at overseas markets. A weak currency and slowing exports from China are expected to aid Indian exports. Due to environmental concerns, China is slated to cut steel capacity by 8 per cent by FY17. China is estimated to have exported 52 million tonnes of steel in 2013 and this is expected to decline by 11 million tonnes by FY15 to 41 million tonnes. This would be an opportunity for Indian steel makers. With global demand for steel increasing and China cutting exports, Indian steel makers like Tata Steel, JSW Steel and SAIL stand to gain. JSW could be a major beneficiary of this as its capital expansion phase is over and the company is expected generate free cash flows from FY15.
Source:- business-standard.com
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