The government's focus on affordable housing, the new procurement policy for state-sponsored projects and a floor price for imports have prompted CLSA to come out with a new report on the Indian steel sector. The international brokerage firm said the sector is 'ripe for rerating', in a research note.
Anti-dumping duties for the next four years will keep the earnings volatility in check according to CLSA. The firm also doesn't expect any serious retaliation from other countries on trade, which will help the companies reduce financial stress and service debt.
The brokerage firm expects the government's focus on affordable housing to push demand growth by 5-7 percent over the next four years. With none of the big steel players looking to expand capacity in the near future, the recent procurement policy which gives preference to domestic steel for state-sponsored projects, will only add to demand, said the brokerage house.
The lack of expansion over the last few years will contribute to a limiting supply in the future, meaning net import of steel will rise to 8 percent of consumption by financial year 2020-21, the report said.
These developments will leave pricing power in the hands of the Indian companies, carving out a premium over imports.
Tata Steel Ltd. and JSW Steel Ltd. are the best positioned among Indian steel manufacturers to take advantage of the positive circumstances, with their “large expansion potential”, the report stated. Here is CLSA’s take on the two steel companies.
Source: Bloomberg