2010年4月印度钢铁行业研究报告

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【出版时间及名称】：2010年4月印度钢铁行业研究报告
        【作者】：瑞士信贷
        【文件格式】：pdf
        【页数】：25
        【目录或简介】：

Sustained outperformance and a valuation premium: Why? It is now
easy to see we were a few months too early in calling an end to the cycle.
But we have been surprised by the sustained outperformance of Indian steel
equities over their global peers, and the valuation premiums they enjoy.
Even over the past three months, global steel equities are flattish, Chinese
equities are down 18%, but Indian and Russian steel stocks have done well.
■
Higher profitability, vertical integration, volume growth? These are the
common explanations for outperformance of Indian steel equities. In this
note, we examine all three and conclude these don’t suffice: 1) including
Corus (as we should – the stock does factor it in) average EBITDA/t for
Indian steel equities is middle of the range; 2) vertical integration in Indian
steel is also not materially above major global peers; and 3) EBITDA growth
for them is also not materially above those of steel stocks globally.
■
Maintain UNDERPERFORM on SAIL, Tata and JSW: Risk-reward for
investors expecting continuation of the steel cycle would be much better in
steel equities ex-India, as outperformance and premium valuations limit
further upside, and also increase downside risks when the cycle does turn.
Cost pressures continue to rise, and we expect steel prices to come under
pressure in 2H CY10 due to supply issues, and in particular in India, as the
government targets prices post the SAIL FPO. We revise our estimates to
factor in a much better-than-expected 1Q11. This also leads to increases in
our target prices. However, we maintain our UNDERPERFORM rating on
SAIL, JSW and Tata, with SAIL expected to perform the best of the three.

Probing the premiums
A valuation premium for Indian steel
Stock prices for Indian steel companies continue to outperform their global peers: since
January 2009, Russian and Indian steel stocks have materially outperformed their global
peers. In particular, over the past three months, when steel stocks globally have been flat,
and those in China have fallen 18%, steel equities in Russia, India and Brazil have done
well.
As a result, not only are the Indian steel stocks trading at the high end of their own
historical ranges, they are also now at a significant premium to steel companies in other
regions on P/B and EV/EBITDA. On FY11E P/E they look cheaper, though largely
because of the weak C1Q for steel companies globally (we use CY10=FY11 to align
reporting calendars). This outperformance and valuation premiums are being attributed to
higher volume growth, higher profitability and better raw material integration: we explore
these, but only to fail in finding a justification.
Profitability and integration
It is commonly believed that Indian firms are among the most profitable in the world –
either because of their raw material integration (SAIL, Tata India), or because of low
conversion costs (JSW). This does show up in EBITDA/t for Indian facilities, but once
Corus is included, as it should be since all comparisons of valuation and price
performance involve it too, overall EBITDA/t for Indian companies is only middle of the
range, and lower than that in Brazil, Korea and Japan.
This “middle of the range” profitability is a reflection of “middle of the range” integration on
raw materials too. Among Indian steel stocks, only SAIL has 100% iron ore integration, as
100% domestic ore integration for Tata steel reduces to 32% on a consolidated basis. A
measure that helps assess the combined vertical integration on ore and coal is the impact
on EBITDA/t if all current increases in ore and coal are passed through via steel prices.
Tata steel and JSW steel are in the bottom half of the companies.
Comparing EBITDA growth
The second reason used to explain the outperformance of Indian steel equities and the
valuation premiums they enjoy is higher volume growth, especially as the domestic
industry is expected to sustain high growth for several years. While we agree on the multiyear
growth story in the market, we find that on the CY09 base (which is the appropriate
one) volume growth in Indian companies is not materially above that expected for their
global peers. To adjust for new volumes being significantly more profitable than existing
average (e.g., Tata), we also compared EBITDA growth. Indian companies do not stand
out whether one uses CY08 or CY09 as the base.
Quarterly RM pricing bad for steel?
The move to quarterly pricing for both iron ore and coking coal is likely to change the steel
industry structure significantly. These changes are likely to play out over several years, but
are nevertheless important to understand. On the whole we believe steel pricing may
move towards a conversion-margin model: the equivalent of explicit Tc/Rc margins for iron
smelters is still some years away, but the direction is clear. In all metals, convertors do not
make money in the current environment, let alone copper smelters, even scrap-based
steel producers make much lower conversion margins. While consolidation in steel may be
a solution, it is unlikely to be meaningful near term. We also don’t think a spot pricing
model for raw materials automatically translates to more stable margins for steel, as
duration of inventory cycles may not shorten – companies with volatile utilisation may hurt.
Companies with full utilisation across cycles anyway have stable margins.

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