Mumbai/New Delhi, 26 June-2014, Bloomberg: India’s steelmakers are set for a rebound. Falling fuel costs just as a new government promises to revive demand growth from the slowest pace in five years are burnishing their earnings outlook.
Contract prices of coking coal, used to fire furnaces, may drop 7 percent to about $112 a metric ton next quarter from the three months through June, according to the average of estimates compiled by Bloomberg from eight industry executives and analysts. Spot prices have tumbled 17 percent this year as demand in China shrank and Australian supplies increased.
At least three of 13 analysts have raised earnings estimates for Tata Steel Ltd. (TATA), Steel Authority of India Ltd. and JSW Steel Ltd. (JSTL), according to data compiled by Bloomberg. Though the producers have struggled to boost profit margins from near a decade-low as an economic slump crimped demand, their shares have outperformed the benchmark index this year on Prime Minister Narendra Modi’s pledge to build 100 cities and rekindle stalled projects.
“We expect coking coal contract prices to drop,” JSW’s Group Financial Officer Seshagiri Rao said in an interview. “Business sentiment is upbeat and construction has picked up well, which means we are selling more and are also able to raise prices.”
Coking coal is scarce in India, with the biggest mine in the eastern state of Jharkhand trapped in a century-old underground fire. India imports about 65 percent of its coking coal requirement, with the top three steelmakers accounting for half of the purchases. State-owned Steel Authority, the biggest importer, uses the shipments to meet 70 percent of its needs.
China’s efforts to cut pollution coupled with an overcapacity in sea-borne coking coal will weigh on prices of the commodity, said Helen Lau, a Hong Kong-based analyst at UOB Kay Hian Ltd.
Demand for the alloy in India may rise at least 4.5 percent in the 12 months ending March 31, rebounding from less than 1 percent last year, the smallest since 2009, fueled by construction and automobiles, according to Jayant Acharya, director at JSW Steel. Peeyush Gupta, vice president at Tata Steel, estimated 5 percent in a newsletter last month.
“The July-September period may be one of the best quarters for Indian steel companies as alloy prices remain high and costs for buying coking coal fall,” said Giriraj Daga, analyst at Mumbai-based Nirmal Bang Equities Pvt. “There can be positive surprises.”
The forecast for Tata Steel’s group net income for the current financial year was raised by six of 13 analysts who updated their projections this month, according to estimates compiled by Bloomberg. ICICI Securities Ltd.’s Abhijit Mitra was the most bullish, lifting his forecast by 46 percent to 40 billion rupees.
For JSW Steel, five of 12 analysts increased profit estimates, with Nirmal Bang’s Daga elevating his by 32 percent to 31.7 billion rupees, while three of 10 Steel Authority (SAIL) analysts raised net income projections. Motilal Oswal Securities Ltd.’s Sanjay Jain boosted his forecast by 12 percent to 31.9 billion rupees.
New Delhi-based Steel Authority rose as much as 1.2 percent to 95.40 rupees and traded at 94.15 rupees as of 9:44 a.m. in Mumbai. Tata Steel increased 0.1 percent to 531.35 rupees, while JSW Steel also climbed 0.1 percent to 1,234.60 rupees. The benchmark S&P BSE Sensex (SENSEX) fell 0.7 percent.
Also leading gains in the $1.5 trillion stock market are India’s utilities, banks and builders as investors bet Modi will clear the investment backlog after taking power last month.
The rally may extend as Modi’s policies lead to higher corporate earnings and fewer bad loans at lenders, Rohit Singhania, who runs the BlackRock Inc’s the DSP BlackRock India T.I.G.E.R. Fund, which invests in shares of nation’s infrastructure companies, said in an interview on June 12.
Operating profit margins are set to improve after the key gauge of profitability narrowed in the 12 months to March 2013 to the least in 10 years for Tata Steel, smallest in 11 years for Steel Authority and to the worst since at least 2007 for JSW, according to data compiled by Bloomberg.
The profit margin at Tata Steel’s Indian operations may expand to 38 percent this financial year from 26 percent, while Steel Authority may see it doubling to 10 percent from 5.2 percent and JSW Steel’s at 13.65 percent versus 11.87 percent, according to the estimates compiled by Bloomberg.
Prime Minister Modi has vowed to build 100 new cities, provide houses to all citizens by 2022, introduce high-speed trains and low-cost airports connecting smaller towns, as he seeks to revive economic growth from a decade low.
A rebound in growth may also increase consumer spending, spurring vehicle sales, said A.S. Firoz, chief economist at the federal steel ministry. Maruti Suzuki India Ltd., the nation’s biggest carmaker, reported a 19 percent increase in May deliveries, the best in nine months after the industry survived the worst slump in a decade.
“The thrust of the government is to improve infrastructure and boost economic growth,” Firoz said by phone in New Delhi. “A natural consequence of an improving economy is a rise in consumption. All of that is great news for the steel industry.”