It’s win-win situation for steel stocks: Amit Dixit
Synopsis
There is sufficient headroom for steel price hike, says the VP, Edelweiss Securities.
The April hike was overdue. Look at how global steel prices have moved. The price of Chinese steel has gone up by almost $100 a tonne which is roughly 15%. But Indian steel prices have remained quite static. In fact, in March producers took a price cut of roughly Rs 1,000-1500. In the last three months, Indian steel prices have not gone anywhere. In fact, we have remained stable even in traders’ markets.
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Now it depends on two things. One is the appetite in the domestic market and second is how much more competitive they are likely to remain with respect to exports. I believe we have got a good headroom not only of domestic steel price hike but there is a separate news flow on the possible hike in automotive contracts now. Both are playing a positive role and a major push on the sentiments.
On how much of a price hike can steel companies take
Amit Dixit: There are two parts to it. One is the domestic market and second is the export market. In the export market, the allocations made to exports in January was roughly 11% but with domestic demand remaining on the softer side, some of the steel players increased export allocations to almost 25%. This is very interesting because previously exports were at a discount to the domestic realisation but now the export realisations have moved up more.
Stocks Recommendations
JSW’s record is impeccable, at least in the domestic market. They have been very successful in doing so in the past. Secondly, it also gives them entry into eastern India which they were vying for quite a bit of time. They have procured an iron ore mine in Odisha. They should be able to improve the economics of this asset.
But having said that, in my view JSW would try to keep it off the balance sheet. They would try to keep a structure. There is very limited resource on their own balance sheet. It would be a little similar to the Monnet equity they accounted for. JSW should be able to do it and it would be a good asset for them. It depends on how they will be able to turn it around but looking at their past track record, they should be able to do it. But getting an asset at a steep valuation always gives you an elongated payback period and that is something I would watch out for.