INDIA’s steel makers 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% to about $112 a tonne 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 fallen 17% this year as demand in China shrank and Australian supplies rose.
At least three of 13 analysts have raised earnings estimates for Tata Steel, Steel Authority of India and JSW Steel, according to data compiled by Bloomberg. Though the producers have struggled to boost profit margins from near a decade-low as an economic slump cut 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. "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% of its coking coal requirement, with the top three steel makers accounting for half of the purchases. State-owned Steel Authority, the biggest importer, uses the shipments to meet 70% 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 a Hong Kong-based analyst at UOB Kay Hian, Helen Lau. The world’s biggest consumer is also planning to reduce a steel capacity glut, estimated at 210-million tonnes, said Bloomberg Industries analysts Kenneth Hoffman and Zhuo Zhang.
Demand for the alloy in India may rise at least 4.5% in the 12 months ending March 31, rebounding from less than 1% last year, the smallest since 2009, fuelled by construction and vehicles, according to director at JSW Steel Jayant Acharya. A vice-president at Tata Steel, Peeyush Gupta, estimated 5% 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 an analyst at Nirmal Bang Equities, Giriraj Daga, in Mumbai. "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’ Abhijit Mitra was the most bullish, lifting his forecast 46% to 40-billion rupees.
For JSW Steel, five of 12 analysts increased profit estimates, with Nirmal Bang’s Mr Daga lifting his 32% to 31.7-billion rupees, while three of 10 Steel Authority analysts raised net income projections.
Motilal Oswal Securities’ Sanjay Jain lifted his forecast 12% to 31.9-billion rupees.
New Delhi-based Steel Authority declined 1.4% to 92.95 rupees in Mumbai on Thursday. Tata Steel retreated 1% to 525.80 rupees, and JSW Steel also fell 1% to 1,221.90 rupees, in line with the drop in the benchmark S&P BSE Sensex. Also leading gains in the $1.5-trillion stock market are India’s utilities, banks and builders as investors bet Mr Modi will clear the investment backlog after taking power last month.
The rally may extend as Mr Modi’s policies lead to higher corporate earnings and fewer bad loans at lenders, said Rohit Singhania, who runs the DSP BlackRock India TIGER Fund, by BlackRock. This invests in shares of the nation’s infrastructure companies, he said 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, 11 years for Steel Authority and 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% this financial year from 26%, while Steel Authority may see it doubling to 10% from 5.2% and JSW Steel’s at 13.65% versus 11.87%, according to the Bloomberg estimates.
Prime Minister Modi has vowed to build 100 new cities, provide houses to all citizens by 2022, and 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 chief economist at the federal steel ministry AS Firoz.
India’s biggest car maker, Maruti Suzuki India, noted a 19% increase in May deliveries, the best in nine months.
Source: Bloomberg
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