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17 March 2017

Asia Pacific/India
Equity Research
Steel

India Steel Sector


Research Analysts
COMMENT
Ravi Shankar
91 22 6777 3869
ravi.shankar@credit-suisse.com The long and flat of it
Neelkanth Mishra
91 22 6777 3716
neelkanth.mishra@credit-suisse.com Figure 1: Improving dynamics for flats: falling imports, rising exports
1,200 1,200
Prateek Singh
kt Total exports kt
91 22 6777 3894 1,000 Total imports 1,000
prateek.singh@credit-suisse.com
800 800

600 600

400 400

200 200

0 0
Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Source: Steelmint, Ministry of Steel, Credit Suisse estimates

■ Two equal halves: one local, other global; we prefer the latter. We look at
the two halves of the steel industry—longs and flats (52%-48% production
split) in this report. While the former is not very well traded and hence,
dependent on domestic demand, the latter is seeing a double benefit from
import substitution and rising exports. With China cutting capacity and its mills
focusing on local demand (net exports have halved since Sep-15), we see
bright prospects for flat manufacturers (mainly JSW Steel and Tata) in the
form of rising utilisation levels (near 100%) and continued pricing support.
■ Bulk of new capacity addition is flats - but it is not a concern. We
estimate ~20 mt of incremental capacity getting added during FY17-19 with
flats accounting for ~67%. With exports as an exit route (at realisations that
are not meaningfully lower than domestic’s), oversupply in flats is not a
concern. Within longs, structural have seen healthy domestic demand
(10%, 2011-16), but growth has been weaker for bars/rods (+4%) and rails
(1%). While one could build a scenario of the new 6 mt longs capacity
reaching ~75% utilisation levels over two years, if end-demand grows at
4%, it would still not compare very well with near full-utilisation for flats.
Hence, we regard JSW's product mix as the best (80% flats, negligible
semis) followed by Tata (66% flats).
■ Valuations are not stretched yet. We note the following: (1) given the strong
jump in EBITDA, steel plays are now relatively cheaper on EV-EBITDA vs one
year ago (despite the 40-108% rise in stock prices), but absolute levels still
remain at 7x-8x. (2) On EV per ton of capacity, Tata/JSW/JSPL are all trading
marginally below the replacement cost of US$800-1,000/t, indicating that
valuations are not stretched as yet. (3) Unlike non-ferrous (a consensus buy),
Tata/JSW still have <50% buy ratings. (4) Just a US$10/t higher ASP adds
11-19% upside to our OUTPERFORM stocks: Tata/JSW/JSPL. We raise Tata
Steel’s TP to Rs600 from Rs560 (FY18/19E EPS up 8%) on likely higher
output and better EU spreads. We see clear catalysts too, for Tata in Europe.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
17 March 2017

Focus Charts
Figure 2: Consolidation: Major 4 outpacing the rest Figure 3: Tata/JSW rapidly nearing full ramp-up
20% 100%
% growth in steel output (YoY) Capacity utilization (%)
15%
90%
Major 4: JSW + SAIL + TATA + JSPL
10%
5% 80%
0%
70%
-5%
-10% 60%
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17
Major 4 Rest JSW Steel Tata Steel

Source: Company data, JPC, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Longs insulated from imports Figure 5: Downstream utilisation at 70-75%


25% 100% Upstream Downstream
Imports as % of consumption (cumu.,

CR Coils/ 90%
20%
sheets
80%
15% Plates
HR Coils/ 70%
2012-16)

sheets
10% 60%
GP/GC
5% Pipes 50%

Rail Bars/ rods 40%


0% Structurals
-2% 0% 2% 4% 6% 8% 10% 12%
Domestic consumption growth (2012-16) 2015 2016

Source: JPC, Ministry of Steel, Credit Suisse estimates Source: JPC, Ministry of Steel, Credit Suisse estimates

Figure 6: Best product mix: JSW, followed by Tata Figure 7: ~20 mt capacity adds; 67% flat focused
1 2 3 4 150
NMDC's 3mtpa Nagarnar
100% mt plant, SAIL (BSL)
80% 140 SAIL and JSPL (Angul) 5
60% 6
59% 130
40% 49%
32% 9 142
20% 33% 120
17% 17% 15% Tata's KPO, SAIL
122
0% (RSP, ISP) and JSPL
JSW Tata Steel SAIL (final) JSPL (final) 110
Value Added Flats HRC/Plates/Sheets Value Added Longs Semis FY16-end FY17 adds FY18 adds FY19 adds FY19-end

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 8: Domestic prices US$30-55/t lower vs imports Figure 9: EV/t remains within rational limits
48,000 1,000
44,000 For hot-rolled coils Replacement cost for the industry: $800-1,000/t
800
40,000 Discount to peers, barely
753 764 751 any EBITDA at curr.
36,000 600 US$/t
prices
32,000 400 470
28,000 EV/t
200
24,000
Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 0
From CN From RU Mumbai Tata Steel JSW Steel JSPL SAIL

Source: Steelmint, Credit Suisse estimates Source: Company data, CS RAVE, Credit Suisse estimates

India Steel Sector 2


17 March 2017

The long and flat of it


Steel is not Most of the analysis on steel is based around treating it as a homogenous product. The
homogenous—we total output (whether global or for a particular country) is conveniently summed and netted
analyse it in terms of out against net exports to arrive at a product-agnostic apparent consumption. In this
longs and flats in this report, we take a closer look at the Indian steel market, separately analysing upstream and
report downstream segments to draw end-consumption and pricing related insights

Two equal halves: one local, other global


Steel output growth at At 130 mt, India accounts for 5.5% of global capacity which runs at a higher utilisation (76%)
the Major 4 (Tata, JSW, than the global average (69%). While the top 10 players account for 63% of the capacity, the
SAIL and JSPL) has tail is quite long—there are 308 sponge iron units feeding into 1,100+ induction furnaces. We
outpaced rest of the are indeed seeing industry consolidation with 10-15% smaller units having closed in FY16.
industry in each of the Paucity of coal could be a reason then, but a broader market share shift towards big players
last eight quarters continues to play out: steel output growth at the Major 4 (Tata, JSW, SAIL and JSPL) has
outpaced the rest of the industry in each of the last eight quarters.
Finished steel output is India's finished steel output is split almost equally between longs (52%) and flats (48%).
split almost equally While the former is not very well traded and hence, dependent on domestic demand, the
between longs (52%) latter is seeing a double benefit from import substitution and rising exports. With China
and flats (48%) cutting capacity and its mills focusing on local demand (net exports have halved since
Sep-15), we see bright prospects for flat manufacturers (mainly JSW Steel, Tata) in the
form of rising utilisation levels (near 100%) and continued pricing support (lower Chinese
exports imply greater demand for ore in RoW, resulting in higher iron ore prices).

Capacity addition flat heavy; exports remain key


Almost two-thirds of We estimate ~20 mt of incremental capacity getting added during FY17-19 with flats
new capacity addition accounting for ~67%. With exports as an exit route (at realisations that are not
is flat-focused; not a meaningfully lower than domestic’s), oversupply in flats is not a concern. In fact, courtesy
concern, in our view adequate domestic protection, there is scope for a US$30-70/t rise in domestic flat prices,
if local demand gets more supportive.
Longs: structural Within longs, structural have seen a healthy domestic demand (10%, 2011-16), but growth
seeing healthy demand, has been weaker for bars/ rods (+4%) and rails (1%). While one could build a scenario of
but growth weak for the new 6 mt longs capacity reaching ~75% utilisation levels over two years, if end-
bars/rods and rails demand grows at 4%, it would still not compare very well with near full-utilisation for flats.
JSW best positioned to Our analysis suggests that JSW's product mix is the best (80% flats, negligible semis)
benefit, given its followed by Tata (66% flats). While both SAIL/ JSPL have a similar share of rails (8-11%)
product mix; Tata next and semis (9-12%) in the mix, SAIL has a slight advantage (higher value-added flats).
best
Valuations are not stretched yet
Tata/JSW/JSPL still We believe the EV-EBITDA measure continues to be misleading: given the strong jump in
trading marginally EBITDA, steel plays are now relatively cheaper on EV-EBITDA vs one year ago (despite
below the replacement the 40-108% rise in stock prices), but absolute levels still remain at 7x-8x. Over the same
cost of US$800-1,000/t period, we have seen a near consistent 20% rise in EV for Tata, JSW and SAIL. On EV/t
(capacity basis), Tata/JSW/JSPL are all trading marginally below the replacement cost of
US$800-1,000/t, indicating that valuations are not stretched as yet.
Unlike non-ferrous (a Unlike non-ferrous (a consensus buy), Tata/ JSW still have <50% buy ratings. Given the strong
consensus buy), Tata/ rally so far, the market may differentiate going forward: SAIL has a run-up in line with Tata/
JSW still have <50% JSW but with near-zero EBITDA, it still struggles to cover interest costs. JSPL's rise in EV has
buy ratings lagged peers but it could be approaching a turnaround with output ramp-up at Angul. Just a
US$10/t higher ASP adds 11-19% upside to our OUTPERFORM stocks: Tata/JSW/JSPL. We
raise Tata Steel’s TP to Rs600 (FY18/19E EPS up 8%) on likely higher output and better EU
spreads. We see clear catalysts for Tata: UK pension resolution/ JV in Europe.

India Steel Sector 3


17 March 2017

Valuation summary
Figure 10: Valuation summary for steel companies under CS coverage
Name Ticker Rating Mcap EV PE EV:EBITDA P/B DivYld
USD Mn USD Mn 2015 2016 2017 2015 2016 2017 2016 2016
Asia
Angang Steel Company 0347.HK O 6,291 10,183 -8.7 23.9 10.3 58.8 10.0 6.3 0.9 0.0%
Baosteel 600019.SS O 22,157 27,912 112.4 14.3 11.5 12.8 8.2 6.8 1.0 3.9%
Hitachi Metals 5486 N 6,109 6,998 9.8 10.0 15.2 6.9 5.5 7.0 1.4 1.6%
Hyundai Steel Co. 004020.KS O 7,539 17,851 11.4 10.2 8.6 7.5 7.0 6.3 0.5 1.1%
JFE 5411 O 10,389 22,070 8.4 35.0 168.2 6.5 9.3 12.3 0.7 1.5%
Jindal Steel & Power Ltd JNSP.BO O 1,791 8,770 -9.2 -5.5 -5.0 10.0 18.7 13.9 0.6 0.0%
JSW Steel Ltd JSTL.BO O 7,108 12,913 25.9 -62.6 13.8 9.7 15.7 7.7 2.2 0.4%
Kobe Steel 5406 N 3,501 8,862 4.6 -18.5 -397.9 4.7 6.1 8.2 0.6 0.2%
Maanshan Iron & Steel Co 0323.HK O 3,735 6,411 -4.5 17.7 9.8 -82.3 7.9 5.9 1.0 0.0%
Nippon Steel & Sumitomo 5401 N 20,883 37,845 11.8 16.6 20.1 6.2 8.8 9.9 0.9 1.7%
POSCO 005490.KS O 22,469 39,789 129.1 17.1 11.8 8.1 7.3 6.6 0.6 2.6%
Steel Authority of India Ltd SAIL.BO U 4,017 9,102 12.6 -6.3 -9.7 13.3 -16.5 288.0 0.7 0.0%
Tata Steel Ltd TISC.BO O 7,413 19,001 -12.5 -16.1 -25.4 10.7 19.6 9.6 1.7 1.6%
Australia
BlueScope Steel BSL.AX O 5,845 6,425 57.1 26.8 11.4 12.2 8.8 5.2 1.7 0.4%
Sims Metal Management SGM.AX U 1,929 1,749 25.6 67.8 21.7 8.4 12.3 8.1 1.4 1.7%
Europe
Acerinox ACX.MC O 3,997 4,733 83.1 45.6 12.7 15.8 13.4 7.6 1.8 3.2%
Aperam APAM.AS O 4,037 3,998 23.5 18.9 11.2 8.3 7.9 6.2 1.6 2.9%
ArcelorMittal MT.N O 28,169 45,081 -2.7 14.8 7.3 9.5 7.2 4.9 0.9 0.0%
Evraz EVRE.L O 3,539 8,511 -5.5 10.2 6.0 5.9 5.6 4.6 4.1 0.0%
Kloeckner & Co. KCOGn.DE N 1,174 2,014 -3.2 29.7 14.5 21.0 9.7 7.9 1.0 1.8%
Magnitogorsk Steel MAGNq.L O 6,646 7,765 15.8 5.7 6.9 4.7 4.1 3.4 1.5 4.2%
Novolipetsk Steel NLMKq.L O 11,147 12,238 11.5 11.3 9.2 6.3 5.9 5.3 1.7 7.6%
Outokumpu OUT1V.HE O 4,490 6,042 47.0 29.5 8.2 30.9 19.0 6.2 1.7 1.0%
Salzgitter SZGG.DE U 2,264 3,960 -39.5 60.3 23.8 7.6 8.8 7.9 0.7 0.7%
Severstal CHMFq.L N 11,105 11,420 18.4 6.4 9.2 5.6 6.1 5.8 3.7 5.1%
SSAB SSABa.ST O 3,799 5,665 -71.1 35.1 16.0 15.3 10.1 6.5 0.6 0.0%
Tenaris TENR.MI U 19,012 16,900 -237.2 343.8 88.2 13.5 28.3 18.8 1.7 2.5%
Thyssen Krupp AG TKAG.DE O 14,157 28,063 41.2 38.6 26.5 8.3 9.7 8.0 6.3 0.7%
Vallourec VLLP.PA U 2,596 4,210 -0.8 -3.1 -4.5 -53.8 -18.1 -49.9 0.5 0.0%
Voestalpine VOES.VI N 7,297 12,719 13.3 13.3 14.1 7.9 7.7 7.8 1.4 2.7%
Americas
Companhia Siderurgica CSNA3.SA U 4,913 11,394 9.8 -18.9 24.8 12.6 9.0 6.4 1.9 0.2%
Gerdau GGBR4.SA O 6,872 11,565 -18.3 -428.1 63.8 8.8 8.8 6.8 0.8 0.4%
Industrias CH S.A.B. d ICHB.MX N 2,643 2,228 20.7 13.6 14.3 9.5 8.8 5.3 1.6 0.0%
Nucor Corporation NUE N 20,231 21,942 71.2 26.8 20.1 16.7 10.2 8.7 2.6 2.4%
Ternium TX N 5,363 6,732 661.6 8.2 13.4 6.3 3.9 4.5 1.2 3.4%
United States Steel Corp. X N 6,564 8,080 -21.1 -23.8 27.3 -17.7 23.6 7.7 2.6 0.5%
Source: CS Rave, Credit Suisse estimates

India Steel Sector 4


17 March 2017

Two equal halves: one local, other global


Steel is not Most of the analysis on steel is based around treating it as a homogenous product. The
homogenous—we total output (whether global or for a particular country) is conveniently summed and netted
analyse it in terms of out against net exports to arrive at the apparent consumption. In this report, we take a
longs and flats in this closer look at the Indian steel market, looking at it through the finer lens of upstream and
report downstream segments and dissecting the finished output further into long and flat products
to draw end-consumption and pricing related insights.

Big picture: BF route dominant; scrap usage rising


Figure 11: Capacity additions to take a breather Figure 12: Rising share in global output
mt mt mt % of total
140 14 120 8%
Second wave of
120 capacity addition 12

90 6%
100 10

80 8
60 4%
First wave of
60 6
capacity addition
40 4
30 2%

20 2

- 0 0 0%
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018F 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018F

Addition (mt, RHS) Capacity Production India's share in global output (%, RHS)

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

India has total capacity India has a total capacity of ~130 mt (~5.5% of global capacity) and is now approaching
of ~130 mt (~5.5% of the end of the last major capex cycle (Figure 11). India's share in global steel output has
global capacity) been on a steady rise and is now closer to ~6% (Figure 12).

Figure 13: India steel production map (2016): high dependence on integrated hot metal output

Source: Ministry of Steel, JPC, Credit Suisse estimates

India Steel Sector 5


17 March 2017

India's capacity is Given abundant iron ore, India's capacity is primarily driven by the integrated blast furnace
primarily driven by the route with hot metal accounting for the bulk of metallic charge to produce steel (Figure 13).
integrated blast furnace The share of DRI has been on the decline (Figure 13) and the trend has been gradual, as
route with hot metal against the common perception that the recent drop has been more on account of the
accounting for the bulk deallocation of the captive coal blocks in 2014.
of metallic charge
Scrap usage has been growing steadily and the bulk of it is being sourced domestically,
with imported scrap accounting for ~12% of total usage (Figure 15).

Figure 14: Scrap has been replacing DRI in India Figure 15: … with a bulk of it being sourced
over the years … domestically
60% 40 40%
mt
35 35%
50%
30 30%
40%
25 25%

30% 20 20%

15 15%
20%
10 10%
10%
5 5%

0% 0 0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Hot metal DRI Scrap Scrap for crude steel o/w imported scrap % imported

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

China leads the pack At the steelmaking stage, the basic oxygen furnace route remains the most dominant,
with ~94% of output given high hot metal output in the preceding stage (Figure 16). However, at 43%, it
through the Basic remains low compared to other regions in the world (Figure 17). China leads the pack with
Oxygen Furnace route ~94% of output through the Basic Oxygen Furnace route that primarily requires hot metal
(and less of DRI/scrap) for steel making.

Figure 16: BoF route dominant for crude steel Figure 17: India has relatively low BoF share when
production compared to other geographies
100% 100%

30%
80% 80%

60% 60%
27%
94%
40% 77%
40% 74%
66% 68%
56% 59%

43% 20% 37% 37%


20%

8%
0%
0%
2012 2013 2014 2015 2016

Oxygen route EAF IF route


BoF EF Others

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: IISI, JPC, Credit Suisse estimates

India Steel Sector 6


17 March 2017

Capacity concentrated at the top; and then a long tail


Long tail: 308 sponge Abundant thermal coal availability in India likely spurred numerous secondary mills. As per
iron units feeding into JPC data, while there were only 55 blast furnaces in India and 14 basic oxygen furnaces in
1,100+ induction 2016, there were 308 sponge iron units feeding into 1,100+ induction furnaces (average
furnaces 40 ktpa capacity, Figure 18). These induction furnaces mostly sell to the ~1,400 re-rolling
mills downstream. Although, if we were to compare this data with 2015, almost 10-15%
units shut down across the spectrum, along with a resultant increase in average capacity
(Figure 19). Thus, the data does support anecdotal evidence of mini-mills closing amidst
worsening economics (falling ASP, expensive coal) in 2015-16.

Figure 18: Sponge iron-IF-Rebar market fragmented Figure 19: Some consolidation of late
1,600 40%

1,400 Change from 2015 to 2016


30%
1,200

1,000 20%

800
10%
600

400 0%
200
-10%
0

-20%
Sponge Iron IF Re-rolling HR Flat

# of units % change in units (YoY) % change in avg. capacity (YoY)

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

The top five players Capacity-wise, while the top five players account for almost half of the total installed capacity,
account for almost half the tail remains fat (Figure 20). The trend of closures/market share shift towards major players
of the total installed seems on going: production growth at the major players (JSW + SAIL + Tata + JSPL) has
capacity been outpacing the rest of the industry for at least the last eight quarters (Figure 21 ).

Figure 20: Indian steel capacity: concentrated at the Figure 21: Output growth at major players
top, but has a long tail outpacing the rest, now for at least 8Qs

Concentration in the Indian steel industry 20%


% growth in steel output (YoY)
100%
15%
Major 4: JSW + SAIL + TATA + JSPL
80%
71% 10%
63%
60% 5%
50%

37%
40% 0%

20% -5%

0% -10%
Top 3 Top 5 Top 10 Top 20 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

% capacity with Top n players Major 4 Rest

Source: Company data, JPC, Credit Suisse estimates Source: Company data, JPC, Credit Suisse estimates

India Steel Sector 7


17 March 2017

Longs and flats: two equal halves


Production wise, there We next move to looking at the finished output: India's 90 mt output is spread almost
is a roughly 50:50 split uniformly between long and flat products, with longs now inching slightly ahead
between flats & longs; (Figure 26). Interestingly, this output (and likely consumption) profile closely mirrors
ditto globally the global trend (Figure 23).
Figure 22: Roughly 50:50 split between flats & longs Figure 23: Global production is also equally split
100 60% 100%
mt
80 56%
75%

60 52%
50%
40 48%

25%
20 44%

0 40% 0%
2012 2013 2014 2015 2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Longs Flats % longs Long Flat

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: World Steel Association, Credit Suisse estimates

Four-fifths of the Within longs, four-fifths of the domestic output is in the form of bars and wire rods. In India,
domestic longs output structural (heavy and light sections) form another 17% of output and the rest is in the form
is in the form of bars of rails (SAIL, JSPL being the key suppliers in that segment, Figure 24). This output mix is
and wire rods also closely mirrored by the global trends (Figure 25) as per data from the World Steel
Association. Bars and rods form 74% of the output and structurals form another 13%.

Figure 24: Longs: 80% of output is bars & rods Figure 25: Split of global longs output
Rails Other long
2% products
Structurals Rails 12%
17% Heavey 1% Conc.
sections Reinforcing
5% bars
33%

Light sections
8%

Other bars
Bars & rods 17%
81%
Wire rods
24%
Total longs output (alloy + non-alloy) in FY16: 47.4mt
For 809mt of global longs output (2015)

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: World Steel Association, Credit Suisse estimates

On the flats side, half of the output is in the form of HR coils/strips/sheets and another third
in the form of value added flats (either in the form of cold-rolled steel or as
galvanised/coloured sheets, Figure 26). A clear divergence in India's output compared to

India Steel Sector 8


17 March 2017

the global output profile for flats (Figure 27) is the difference in plates—10% in India vs
almost 33% globally.

Figure 26: Flats: HR forms half of the output Figure 27: Plates appear much more dominant
Pipes (large Other
dia.) 1%
Other flats
Plates 5% 21%
10%

CRC/ CR HR Coil, sheet,


HR Coil/ Strips/ strip
sheets Sheets
16% 46%
52%

HR Plates
GP/GC 33%
sheets/coil
16%

Total flats output (alloy + non-alloy) in FY16: 43.6mt For 737mt of global flats output (2015)

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

Longs almost fully insulated; flats impacted by China


Longs are not very well Looking at the last five years of data, we segregate different long and flat products by the
traded; hence growth in demand and domestic supply. JPC data adjusts for import-export, double-
dependent on domestic counting and inventory changes to compute apparent consumption. If we were to plot that
demand with growth in output, the domestic industry has closely met demand most notably for long
products like structural and bars/rods (Figure 28). For most other product categories,
domestic output has lagged demand growth with imports seeing a rise.

Figure 28: Structurals demand fastest growing; HR Figure 29: Longs insulated from imports; plates and
coils/GP/GC sheets also rising at ~8-9% CR had weak demand + elevated imports till 2016
12% 25%
Imports as % of consumption (cumu., 2012-16)

Structurals
Domestic production growth (2012-16)

9% CR Coils/
20%
sheets
Tin plates GP/GC
6%
Bars/ rods Plates
HR Coils/ 15%
sheets
3%
Pipes HR Coils/
10% sheets
Rail
0% Electr.sheets GP/GC
Pipes
5%
-3% Plates
CR Coils/ Rail Bars/ rods
sheets Structurals
-6% 0%
-6% -3% 0% 3% 6% 9% 12% -2% 0% 2% 4% 6% 8% 10% 12%
Domestic consumption growth (2012-16) Domestic consumption growth (2012-16)
Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

A glance at Figure 29 clearly shows that long products have barely seen any imports (<5%
of domestic demand). Imports have been particularly high for HR, CR and plates (10-20%)
of imports) during the 2012-16 period before the government started putting import curbs.
The imports of CR and plates particularly hit the industry hard as the domestic demand

India Steel Sector 9


17 March 2017

was anyways weak. Cold-rolled steel has usually been a commonly imported item (Figure
30) but the surge post 2014 hit domestic players hard, given pricing also came under
pressure during this time period. It is important to distinguish these imports with those of
special types of steel (electric/tin plates, see Figure 31) where we believe local capacity is
insufficient to meet domestic demand.

Figure 30: CR commonly imported; imports surged Figure 31: Special types of steel (electric/tin plates)
post 2014-16 forcing government to put curbs have traditionally been imported
30% 90%
Imports as % of domestic demand
80%
25%
70%

20% 60%

50%
15%
40%
Imports as % of domestic demand
10% 30%

20%
5%
10%

0% 0%
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

Plates HR Coils/ sheets CR Coils/ sheets GP/GC Electr.sheets Tin plates

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

Downstream utilisation For most products other than certain special steel products, there is ample domestic
levels at 70-75% in capacity available in India. Overall utilisation levels have been improving but still remain
FY16; these would have below 80% (in terms of steel making, Figure 32). Utilisation levels at cold-rolling mill stood
improved in the last 11 at 70% at the end of FY16, implying that imports pre-2016 were more a case of cheaper
months imports flooding domestic markets (Figure 33).

Figure 32: Utilisation levels no longer falling Figure 33: Downstream utilisation at 70-75%
100%
Upstream Downstream

90%

80%

70%

60%

50%

40%

2015 2016

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

It is also worth noting that a big pocket of underutilisation still exists at sponge iron mills
(near-50%) and electric arc furnaces (sub-70%). This could keep longs pricing in check,
despite minimal threat of imports in that category.

India Steel Sector 10


17 March 2017

Capacity addition flat heavy; exports remain


key
With the detailed industry structure in place, we move to drawing conclusions on pricing
for various sub-segments, depending on how the supply could potentially change in each
of them. As mentioned in the first section, India's steel industry is approaching the end of a
big wave of capacity expansion. Most notable additions would be from SAIL's and JSPL's
end in FY18.

New capacity mostly flat-focused


We see at least 20 mt of Starting March 2016, we see at least 20 mt of capacity getting added to the system by the
capacity getting added, major players (including NMDC's 3 mt steel plant, Figure 34). Given more blast furnace
67% of which, would be capacity is being added, downstream addition is also going to be flat-heavy, as scale is
flats key for flats production. We expect almost two-thirds of new crude steel output to be
directed towards flat-producing continuous casters/slab casters (Figure 35).

Figure 34: ~20 mt of capacity additions (FY17-19)… Figure 35: …mostly focusing on flats
150
mt NMDC's 3mtpa Nagarnar
plant, SAIL (BSL)
Longs
140 SAIL and JSPL (Angul) 33%
5

6
130

9 142
Flats
Tata's KPO, SAIL 67%
120
(RSP, ISP) and JSPL
122

110
FY16-end FY17 adds FY18 adds FY19 adds FY19-end Split of 20mt of incremental capacity additions since Mar-16

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

FY16 saw major capacity addition from JSW Steel (towards the end), followed by Tata
Steel adding 3 mt in FY17. Going forward, a bulk of the capacity addition would be from
SAIL, JSPL and NMDC.
Given plant-level complexities for SAIL, we looked at the company's projected change in
mix from end-2016 to eventually post the completion of the modex (modernisation-cum-
capital expenditure) spread over its saleable steel output ramp-up from 12.4 mt to 20.2 mt
(Figure 36). We would like to particularly highlight 1.2 mt of plate output amidst flat end-
demand for plates in the last four years (see Figure 29). The addition on the longs side is
largely domestic demand dependent: while structural sections see strong growth, the
demand has been a bit weak for bars/rods. For rails, there has been barely any demand
growth. Given only one major buyer (Indian Railways) and a few small orders from Middle-
East, we could see continued low levels of utilisation.
JSPL is also at the JSPL is also at the cusp of adding capacity at its Angul plant in Odisha (see our note, for
cusp of adding more details on the facility). It already has ~4.2 mt of casting capacity and we believe, with
capacity at its Angul increased hot metal/steel output in the coming months, JSPL may choose to add some
plant in Odisha more billet casting capacity sometime over the next 1-2 years (Figure 37). Just like SAIL,
we see JSPL too adding more plates output. We remain cautious on a quick ramp-up of

India Steel Sector 11


17 March 2017

the plate capacity, and hence, keep FY18E crude steel output for JSPL at 4.6 mt,
meaningfully lower than management guidance.

Figure 36: SAIL: plates/rail capacity could take time Figure 37: JSPL: longs capacity could ramp up,
to ramp-up (weak demand) plates remain a weak segment
Incremental output for SAIL (chg. from FY16) 6
9 Incremental output for JSPL's Angul
mn t
8 0.8
5
2.5
7 0.6
6 4
Flats
5 2.0
2.0
3
4 0.7 Saleable steel 7.8 4.0
capacity rising from
3
1.7 12.4mt to 20.2mt 2
2 1.4
Longs
1 1.2 1
Longs
0 0.4 0.8 0.8
0
Current Output Slab caster Billet caster Billet caster Final
at Angul (optionality)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

NMDC's 3 mtpa Nagarnar steel plant is almost fully flat focused (Figure 38). The output is
expected to be not just plain-vanilla HR, but also special grades used in oil and gas, LPG
cylinders, autos, etc. However, we believe meaningful output from the NMDC plant could
only come by end-FY19 as the green-field plant (hot metal generation as well as
downstream mills) stabilises. The potential change in owner (NMDC is on the lookout for a
strategic investor willing to purchase the half-built plant) could also have an impact on the
commissioning timeline.

Figure 38: A wide variety of flat-focused products expected from NMDC's plant
Product Capacity (in kt)
HR Plates 800
API grade 500
HR Sheets 200
LPG Cylinder grade sheets 200
HR Coils 946
High Carbon Steel 50
Silicon Steel 100
Automotive steel 50
Other 154
Total Finished Steel 3,000
Source: Company data, Credit Suisse estimates

Despite the heavy addition of flats capacity, we are not concerned about pricing given the
option to export out at reasonable margins. We look at exports and regional realisations next.

Exports key for flats; pricing dependent on China


Post the barrage of Post the barrage of duties (minimum import price, anti-dumping, safeguard), imports into
duties (minimum India have declined meaningfully. At the same time, the revival in prices has helped
import price, anti- exports. India is set to turn a net steel exporter in FY17 (Figure 39) albeit with a small
dumping, safeguard), quantum.
imports into India have
declined meaningfully

India Steel Sector 12


17 March 2017

However the current run-rate as seen so far in CY17 point to a near 4 mt annualised net
exports (Figure 40). This takes significant pressure off from domestic oversupply.

Figure 39: India to become a net exporter in FY17 Figure 40: Current net exports annualising at ~4 mt
12 8 12
mt
10 6
8

8 4

4
6 2

4 0
0

2 -2

-4
0 -4 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Imports Exports Net imports (RHS) Net steel imports for India (ann. Run rate, mt)

Source: Steelmint, Ministry of Steel, Credit Suisse estimates Source: Steelmint, Ministry of Steel, Credit Suisse estimates

Falling imports, rising Flats are de facto, the most commonly traded items. Starting end-2015, imports started to
exports: double benefit moderate, with a step-down impact clearly visible from March 2016 onwards, after the
for domestic flats imposition of the Minimum Import Price (MIP, Figure 41).
manufacturers
At the same time, exports started to lift (Figure 42) across sub-categories within flats, led
by hot-rolled and galvanised steel.

Figure 41: Step-down in imports in Mar-16 post MIP Figure 42: Exports led by HRC, value-added flats
1,200 1,200 1,200 1,200
kt kt kt kt
1,000 1,000 1,000 1,000

800 800 800 800

600 600 600 600

400 400 400 400

200 200 200 200

0 0 0 0
Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

HRC/ Plate CRC Galvanized steel HRC/ Plate CRC Galvan.


Electrical steel Others Imports Electri. Others Exports

Source: Steelmint, Ministry of Steel, Credit Suisse estimates Source: Steelmint, Ministry of Steel, Credit Suisse estimates

The key reason behind the pick-up in exports has been the improvement in prices across
regions globally (Figure 43). This has been on the back of an improvement in Chinese
domestic demand that has shifted Chinese mills' output away from the export market to
the domestic. Compared to a peak 120 mtpa Chinese net steel export run-rate seen in
September 2015, current levels have almost halved since then (Figure 44 ). Given CS
house view is that end-demand in China is set to remain strong throughout 2017, we could
see weak exports and thus, minimal disruption to the rest of the world prices this year.

India Steel Sector 13


17 March 2017

Existing high levels of utilisation coupled with the on-going push to cull steel capacity
should keep the pricing power of steel mills high. Thus, steel prices look unlikely to crash
anytime soon.

Figure 43: Prices now stabilising at a new normal Figure 44: Chinese exports have fallen sharply
900 140
mt
800 120

100
700
80
600
60
500
40
400
20

300 0

200 -20
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-07 Mar-08 May-09 Jul-10 Sep-11 Nov-12 Jan-14 Mar-15 May-16

Steel Price ($/t): China US N. Europe Net Chinese Steel exports (month day adj. fig. annualized)

Source: The BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: The BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

In India, we are seeing In India, we are seeing a bit of divergent trends between the prices of longs and flats. Flats
a bit of divergent prices have come off a bit from its January highs in the last one month or so. This could be
trends between the due to the dealers liquidating inventory from marked high levels of December (steel mills
prices of longs and pushed inventory in 3Q, given dealer willingness to buy ahead of the January price hikes).
flats It is worth repeating that imports are still not trickling-in. At current prices, only the 12.5%
import duty is effective, as India imposes anti-dumping/safe-guard duties only when the
CIF price is below a certain threshold (Figure 45).

Figure 45: Protectionism in flats: at current prices Figure 46: Landed imported steel prices at a
only import duty matters premium to domestic HR prices
800 48,000
Landed import price (US$/t) for varying CIF price of HR steel For hot-rolled coils
700
44,000
600
40,000
500

400 36,000

300
32,000
200
28,000
100

0 24,000
350 370 390 410 430 450 470 490 510 530 550 570 590 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

CIF Price Import Duty AD Duty SG Duty From CN From RU Mumbai

Source: Ministry of Steel, Ministry of Commerce, Credit Suisse estimates Source: Bloomberg, Steelmint, , Credit Suisse estimates

If we look at import parity prices, then domestic HRC prices are at a US$30-55/t discount
to imports from Russia and China (Figure 46). Thus, domestic manufacturers could in
theory take Rs2,000-3,500/t hikes, provided the hikes get absorbed domestically.

India Steel Sector 14


17 March 2017

Scope for domestic Similarly, domestic CR prices are at an even steeper discount of US$70/t (Figure 47) vs
HRC prices to rise by imports from China and ~US$40/t when compared with imports from Russia.
US$30-50/t, if domestic
demand remains Indian steel mills can always choose to export the produce at US$30-40/t lower
supportive realisations in the export market. Port side manufacturers like JSW (and now Tata, with
Kalinganagar ramp-up) have an advantage on that front.

Figure 47: Scope for domestic prices hikes on CR Figure 48: Longs prices catching up; of late some
even higher at US$70/t weakness in flats prices
48,000 600
For cold-rolled coils

44,000 550

40,000 500

36,000 450

32,000 400

28,000 350

24,000 300
Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17

From CN From Ukr Mumbai Longs (Dealer level, pre-taxes, US$/t) Flats

Source: The BLOOMBERG PROFESSIONAL™ service, Steelmint, , Credit Suisse estimates Source: The BLOOMBERG PROFESSIONAL™ service, Steelmint, , Credit Suisse estimates

At the same time, longs prices have started to pick-up (Figure 48): there is an element of
cost push recently—domestic ore prices have risen at both NMDC as well as domestic
miners (making sponge iron costlier) and so has the e-auction premium on coal. 4Q is also
typically a strong month for construction activity in India and thus, pricing could be getting
support from end-demand as well.

Domestic demand revival key for longs


Figure 49: Capacity addition spree coming to an end Figure 50: Engg. & fabrication and real estate matter
soon; industry could start seeing higher utilisation most for steel demand
Packaging Other
Railways 5%
2%
2%
Automotive
3% Engg. &
Energy fabrication
4% 43%

Infrastructure
12%

RE
Construction
29%

Split of 82mt of real end-demand for steel (2016)

Source: Company data, Credit Suisse estimates Source: Ministry of Steel, Credit Suisse estimates

India Steel Sector 15


17 March 2017

We build in a modest 3- We see a major capex cycle coming to an end soon for the Indian steel industry (Figure
5% growth in steel 49) with SAIL and JSPL now inching closer to commissioning. With that, utilisation levels
demand for FY18-19, should start inching up in the next 2-3 years before Tata/JSW announce the next wave of
but in theory, the steel growth capex.
demand should
normalise to ~6-7% As per the data from the Ministry of Steel, engineering and fabrication (white goods, yellow
levels in the long run goods, capital goods) and real estate account for almost 70% of India's steel demand
(Figure 50). Infrastructure, autos, railways, etc., account for the remaining 30%.
With regards to the Indian supply-demand scenario, we build in a modest 3-5% growth in
steel demand for FY18-19 (Figure 51). With production expected to grow by 6-7% (we
assume new capacity runs at 50% utilisation in the first year of commissioning), we get a
net export requirement of 3-6 mt in each of the next two years, which is not very different
from the current run rate (see Figure 40).

Figure 51: Dependence on exports to raise


in mt 2013 2014 2015 2016 2017e 2018e 2019e Remarks
Capacity 97 101 110 122 131 137 142
Production 82 88 89 90 99 105 112
% growth YoY 11.1% 7.3% 1.5% 0.9% 9.9% 6.3% 6.7%
Eff. Utilization 84% 87% 81% 74% 76% 77% 79% Assumes new capacity at 50% utilisation
Net imports 2.6 -0.5 3.7 7.6 -0.3 -3.6 -5.6 FY18E exports match current run rate
App. Consumption 84 87 93 97 98 101 106
% growth YoY 11.2% 3.4% 6.4% 5.1% 1.0% 3.0% 5.0% Assuming gradual normalization in demand
Source: Ministry of Steel, Credit Suisse estimates

Eventually, we expect domestic steel demand to normalise to ~6.5% levels, based on our
bottom-up assessment as shown in Figure 52.

Figure 52: We expect India's steel demand to normalise to ~6.5% levels (vs ~4% in the last three months)
Consumption CS growth
What it includes? Remarks
(2016, mt) assumption
Total 81.5 6.5%
Engg. & fabrication 35.0 7.0% Capital goods, cons. durables, yellow goods In-line with GDP growth
RE Construction 23.5 5.0% Residential, Commercial Subdued, low cost housing not as steel intensive
Infrastructure 9.5 9.0% Highways, airports, urban infra, steel Higher than GDP growth, given infra deficit
Energy 3.0 3.0% Power, wind-mills Not much of capacity addition required
Automotive 2.5 9.7% Cars, 2W, CVs, tractors Bottom-up estimate; import substitution likely
Railways 2.0 7.0% Rail tracks, rolling stocks, wagons
Packaging 2.0 7.0% LPG cylinders, grain bins
Other 4.0 6.0% Ship building, oil & gas pipelines, defence
Source: Ministry of Steel, Credit Suisse estimates

India Steel Sector 16


17 March 2017

Valuations aren't stretched yet


EV up only 20% in one year; debt concerns receding
EV for Tata/ JSW/ SAIL For stocks that are already up 40-100% since January 2016, maintaining a bullish view
is up ~20% in the last comes with its own perils. However, if we look at the EV, the changes have been less
one year drastic, thanks to the high financial leverage.

Figure 53: One year move in EV has been Figure 54: EV/t (based on crude steel capacity)
remarkably homogenous (barring JSPL) remains within rational limits
120% 1,000
108%
Replacement cost for the industry: $800-1,000/t
100%
800
Discount to peers,
80% 753 764 751 structurally high costs,
US$/t barely any EBITDA at
600 curr. prices
60%
48%
42% 40%
40% 400 470

21% 23% 20%


20% 12% EV/t
200
0%
Tata Steel JSW Steel JSPL SAIL
0
EV Mcap Tata Steel JSW Steel JSPL SAIL

Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates

Strong EBITDA growth: Over the last one year, we have seen a near consistent 20% rise in EV for Tata, JSW and
valuations have only SAIL (Figure 52). JSPL's EV is up only ~12%, as longs prices struggled for most of CY16.
improved on EV- However, if we see EV/t (capacity basis), Tata/JSW/JSPL are all trading marginally below
EBITDA basis vs last the replacement cost of US$800-1,000/t, indicating that valuations are not stretched as yet
year! (Figure 53). At the same time, balance sheet concerns have also retreated: Net debt to
EBITDA has fallen across companies (Figure 54) and coverage ratios have also improved
(Figure 55).

Figure 55: Net-debt to EBITDA has improved Figure 56: Coverage rations have also improved
4.0x
12.0x Interest coverage (EBITDA: interest, quarterly)

3.0x
9.0x

6.6x
6.0x 2.0x
4.8x
3.9x
3.2x
3.0x 1.0x

0.0x
Tata Steel JSW Steel (incl. JSW Steel (w/o JSPL 0.0x
accept.) accept.) Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17

Mar-16 Now 1-Year from now Tata Steel JSW Steel JSPL

Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates

India Steel Sector 17


17 March 2017

EV-EBITDA remains a misleading parameter


A small US$10/t up We believe the EV-EBITDA measure continues to be misleading: Given the strong jump in
move in ASP adds 11- EBITDA, steel plays are now relatively cheaper on EV-EBITDA vs one year ago (Figure
19% upside (at 7x EV- 56). This is despite the 40-108% rise in stock prices. However, at an absolute level of 7x-
EBITDA) to our buys: 8x, EV-EBITDA valuations do not quite appear mouth-watering cheap yet. Indian names
Tata/JSW/JSPL appear to be trading at a premium to regional peers on EV-EBITDA, which is justified
given the scope for production ramp-up from existing levels (Figure 57).

Figure 57: More sane EV-EBITDA now vs one year ago Figure 58: EV-EBITDA: At a small premium vs peers
226x Usiminas 10.5
12.0x SAIL 9.4
Nucor 8.4
9.4x JSPL 8.2
9.0x 8.2x Tata Steel 7.6
7.6x
7.1x US Steel 7.4
6.4x Gerdau 6.8
6.0x Baosteel 6.7
POSCO 6.4
Voestalpine 6.4
3.0x JSW Steel 6.4 Median: 6.7x
Hyundai Steel 6.2
Angang-H 6.2
0.0x Maanshan-H 5.8
Tata Steel JSW Steel JSW Steel (w/o JSPL SAIL ArcelorMittal 4.1
(incl. accept.) accept.)
0 3 6 9 12
Mar-16 Now Fwd. EV/EBITDA

Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates

Even a small US$10/t up move in ASP adds 11-19% upside (at 7x EV-EBITDA) to our
buys: Tata/JSW/JSPL.

JSW/ Tata well placed on the P/B vs RoE framework


Figure 59: Both JSW/ Tata well placed vs. peers on P/B vs. RoE
24%
JSW Steel
20%

16%

12% Tata Steel Nucor


ArcelorMittal
Return on Equity

Maanshan-H
Angang-H Voestalpine US Steel
8% Baosteel
Hyundai Steel CSN
POSCO
4% SAIL
Usiminas
Gerdau
0%
JSPL
-4%
0.0 0.5 1.0 1.5 2.0 2.5
Price to Book (P/B)

Source: The BLOOMBERG PROFESSIONAL™ service, CS RAVE, Company data, Credit Suisse estimates

When measured on P/B vs RoE, JSW Steel comes across as particularly cheap, while
Tata Steel looks in line with the peers (Figure 58).

India Steel Sector 18


17 March 2017

It is also worth noting that the last time when prices were around similar levels, the steel
stocks have traded at a higher EV/t (Figure 59).

Figure 60: Tata/JSW have traded at higher EV/t in the past


900 2,100

$/t EV/t (US$)


800 1,800

700 1,500

600 1,200

500 900

400 600

300 300

200 0
Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15
HRC Steel price (LHS) EV/t for Tata Steel India (adj.) SAIL JSW Steel

Source: The BLOOMBERG PROFESSIONAL™ service, CS RAVE, Company data, Credit Suisse estimates

India Steel Sector 19


17 March 2017

Asia Pacific/India
Steel

Tata Steel Ltd (TISC.BO / TATA IN)


Rating OUTPERFORM
Price (16-Mar-17, Rs) 499.15
Target price (Rs) (from 560.00) 600.00
Upside/downside (%) 20.2 Improved confidence on India volumes; higher
Mkt cap (Rs/US$ mn) 484,782 / 7,413
Enterprise value (Rs mn) 1,296,523 EU spreads
Number of shares (mn) 971.22
Free float (%) 68.0
■ Falling Chinese exports provide opportunities to Indian flat players.
52-wk price range (Rs) 500-296 With falling Chinese exports, Indian flat players are well positioned to benefit
ADTO-6M (US$ mn) 41.9 from higher volumes at realisations that are not meaningfully lower than
Target price is for 12 months.
domestic ASPs. Current Indian hot-rolled export offers are at US$500-510/t
Research Analysts vs domestic ex-works price of ~US$530/t.
Ravi Shankar
■ Smooth ramp-up at Kalinganagar. With exports now a viable option,
91 22 6777 3869
ravi.shankar@credit-suisse.com securing incremental sales for the Kalinganagar output would not be an
Neelkanth Mishra issue, given its proximity to ports as well. We believe the facility can add 0.9-
91 22 6777 3716 1.1 mt of additional sales in FY18 vs the current fiscal.
neelkanth.mishra@credit-suisse.com
Prateek Singh ■ EU steel spreads shooting up. EU spot steel spreads are almost US$100/t
91 22 6777 3894 higher compared to the 3Q average. Although coking coal prices have come
prateek.singh@credit-suisse.com
off, EU steel prices are holding up very well (now near ~US$600/t). While
Tata Steel Europe reported US$40/t of EBITDA in 3Q on account of lower
ASPs, the buoyant EU prices should start reflecting in P&L as Tata gradually
renegotiates its contracts (mostly auto, ~20-30% of volumes).
■ We see clear catalysts—UK pension resolution/JV in EU. Tata has
already moved its active employees from a defined benefit plan to a defined
contribution scheme and is now working at delinking the pension plan from
the business. Post that, the decks would be cleared for an eventual
JV/merger with ThyssenKrupp's EU steel division.
■ Valuation. We incorporate higher India volumes (FY18E of 11.9 mt from 11.4
mt earlier) and slightly better EU EBITDA/t (US$60/t vs US$57/t earlier). This
results in an 8% rise in FY18/19E EPS. Our new TP of Rs600 (at 1.5x P/B;
from Rs560) implies an EV/t of US$810, i.e., an 8% rise from current levels.
Given Tata Sons’ decision to reduce cross-holdings, the market should start
ascribing full value to Tata Steel’s near ~Rs42 bn stake in Tata Motors/ Tata
Chemical.
Share price performance Financial and valuation metrics
Year 3/16A 3/17E 3/18E 3/19E
Revenue (Rs mn) 1,159,517.4 1,101,623.3 1,225,076.4 1,230,629.8
EBITDA (Rs mn) 63,858.0 134,480.8 164,261.9 168,694.0
EBIT (Rs mn) 13,039.6 79,570.5 106,988.0 110,651.3
Net profit (Rs mn) (30,493.2) (20,144.6) 45,953.9 48,795.1
EPS (CS adj.) (Rs) (31.01) (20.48) 46.73 49.62
Change from previous EPS (%) n.a. - 7.9 8.4
Consensus EPS (Rs) n.a. 21.14 45.12 52.78
EPS growth (%) n.m. n.m. n.m. 6.2
The price relative chart measures performance against the P/E (x) (16.1) (24.4) 10.7 10.1
S&P BSE SENSEX IDX which closed at 29,585.85 on Dividend yield (%) 1.6 1.6 1.6 1.6
16/03/17. On 16/03/17 the spot exchange rate was EV/EBITDA (x) 19.6 9.7 7.9 7.5
Rs65.4/US$1 P/B (x) 1.72 1.92 1.67 1.47
Performance 1M 3M 12M ROE (%) (10.2) (7.5) 16.7 15.6
Absolute (%) 5.7 20.5 66.8 Net debt/equity (%) 254.6 298.6 262.2 220.6
Relative (%) 1.3 8.8 47.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

India Steel Sector 20


17 March 2017

Tata Steel Ltd (TISC.BO / TATA IN)


Price (16 Mar 2017): Rs499.15; Rating: OUTPERFORM; Target Price: (from Rs560.00) Rs600.00; Analyst: Ravi Shankar
Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E Company Background
Sales revenue 1,159,517 1,101,623 1,225,076 1,230,630 Tata Steel Limited is a diversified steel producer. It has a global
Cost of goods sold 689,623 522,378 650,098 644,500 presence in 50 markets and manufacturing operations in 26
EBITDA 63,858 134,481 164,262 168,694 countries. It provides steel for different industries, which include
EBIT 13,040 79,570 106,988 110,651 construction, automotive, aerospace, consumer goods.
Net interest expense/(inc.) 41,286 51,732 53,388 52,766
Recurring PBT 23,008 37,165 66,674 71,118 Blue/Grey Sky Scenario
Profit after tax 7,959 13,920 45,705 48,546
Reported net profit 9,255 14,169 45,954 48,795
Net profit (Credit Suisse) (30,493) (20,145) 45,954 48,795
Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E
Cash & cash equivalents 115,783 89,816 81,060 111,397
Current receivables 117,012 111,169 123,628 124,188
Inventories 203,560 193,396 215,069 216,044
Other current assets 201,121 191,079 212,492 213,456
Current assets 637,475 585,461 632,249 665,085
Property, plant & equip. 812,636 831,739 858,479 864,450
Investments 20,845 20,886 20,927 20,968
Intangibles 130,722 127,779 124,835 121,891
Other non-current assets 30,821 26,168 23,518 19,566
Total assets 1,632,500 1,592,033 1,660,008 1,691,960
Current liabilities 549,142 521,180 560,131 560,213
Total liabilities 1,330,969 1,319,509 1,350,209 1,342,040
Shareholders' equity 284,789 255,782 293,057 333,178
Minority interests 16,542 16,542 16,542 16,542
Total liabilities & equity 1,632,500 1,592,033 1,660,008 1,691,960
Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E
EBIT 13,040 79,570 106,988 110,651
Net interest (41,286) (51,732) (53,388) (52,766)
Tax paid (15,050) (23,245) (20,969) (22,571)
Working capital (20,041) (5,413) (14,844) (668)
Other cash & non-cash items 63,622 30,173 70,598 71,524 Our Blue Sky Scenario (Rs) 680.00
Operating cash flow 284 29,353 88,384 106,170 At a P/B of 1.7 (previous peak of 1.9x) times book value (last
Capex (48,894) (70,000) (77,056) (57,056) reported as per IndAS), Tata Steel would be valued at Rs680/ share
Free cash flow to the firm (48,610) (40,647) 11,327 49,114
Investing cash flow (44,240) (66,458) (78,461) (57,159) Our Grey Sky Scenario (Rs) 400.00
Equity raised 9,548 (1,091) (907) (903) At a P/B of 1x (barely covers cost of capital) times last reported book
Dividends paid (7,760) (7,771) (7,771) (7,771) value, Tata Steel would be valued at Rs400/ share
Financing cash flow 57,243 11,138 (18,679) (18,674)
Total cash flow 13,287 (25,967) (8,756) 30,338 Share price performance
Adjustments 0 0 0 0
Net change in cash 13,287 (25,967) (8,756) 30,338
Per share 03/16A 03/17E 03/18E 03/19E
Shares (wtd avg.) (mn) 983 983 983 983
EPS (Credit Suisse) (Rs) (31.01) (20.48) 46.73 49.62
DPS (Rs) 7.99 8.00 8.00 8.00
Operating CFPS (Rs) 0.29 29.85 89.87 107.96
Earnings 03/16A 03/17E 03/18E 03/19E
Growth (%)
Sales revenue (16.2) (5.0) 11.2 0.5
EBIT (75.9) 510.2 34.5 3.4
EPS 22.3 33.9 328.1 6.2
Margins (%)
EBITDA 5.5 12.2 13.4 13.7
EBIT 1.1 7.2 8.7 9.0 The price relative chart measures performance against the S&P BSE SENSEX
Valuation (x) 03/16A 03/17E 03/18E 03/19E IDX which closed at 29,585.85 on 16-Mar-2017
P/E (16.1) (24.4) 10.7 10.1 On 16-Mar-2017 the spot exchange rate was Rs65.4/US$1
P/B 1.72 1.92 1.67 1.47
Dividend yield (%) 1.6 1.6 1.6 1.6
EV/sales 1.1 1.2 1.1 1.0
EV/EBITDA 19.6 9.7 7.9 7.5
EV/EBIT 96.0 16.3 12.1 11.4
ROE analysis (%) 03/16A 03/17E 03/18E 03/19E
ROE (10.2) (7.5) 16.7 15.6
ROIC 0.4 2.8 6.6 6.7
Credit ratios 03/16A 03/17E 03/18E 03/19E
Net debt/equity (%) 254.6 298.6 262.2 220.6
Net debt/EBITDA (x) 12.02 6.05 4.95 4.58
Source: Company data, Thomson Reuters, Credit Suisse estimates

India Steel Sector 21


17 March 2017

Companies Mentioned (Price as of 16-Mar-2017)


Acerinox (ACX.MC, €13.495)
Angang Steel Company Ltd (0347.HK, HK$6.2)
Aperam (APAM.AS, €48.21)
ArcelorMittal (MT.N, $9.19)
Baosteel (600019.SS, Rmb6.91)
BlueScope Steel (BSL.AX, A$13.25)
Companhia Siderurgica Nacional (CSNA3.SA, R$11.42)
Evraz (EVRE.L, 204.9p)
Gerdau (GGBR4.SA, R$13.07)
Hitachi Metals (5486.T, ¥1,619)
Hyundai Steel Co. (004020.KS, W63,900)
Industrias CH S.A.B. de C.V. (ICHB.MX, MXN116.86)
JFE (5411.T, ¥2,042)
JSW Steel Ltd (JSTL.BO, Rs192.3, OUTPERFORM, TP Rs240.0)
Jindal Steel & Power Ltd (JNSP.BO, Rs128.0, OUTPERFORM[V], TP Rs150.0)
Kloeckner & Co. (KCOGn.DE, €10.97)
Kobe Steel (5406.T, ¥1,095)
Maanshan Iron & Steel Co Ltd (0323.HK, HK$3.16)
Magnitogorsk Steel (MAGNq.L, $7.74)
Nippon Steel & Sumitomo Metal (5401.T, ¥2,681)
Novolipetsk Steel (NLMKq.L, $18.6)
Nucor Corporation (NUE.N, $63.45)
Outokumpu (OUT1V.HE, €10.05)
POSCO (005490.KS, W291,500)
SSAB (SSABa.ST, Skr36.52)
Salzgitter (SZGG.DE, €35.11)
Sims Metal Management (SGM.AX, A$12.7)
Steel Authority of India Ltd (SAIL.BO, Rs63.6, UNDERPERFORM, TP Rs35.0)
Tata Chemicals (TTCH.BO, Rs580.45)
Tata Motors Ltd. (TAMO.BO, Rs480.4)
Tata Steel Ltd (TISC.BO, Rs499.15, OUTPERFORM, TP Rs600.0)
Tenaris (TENR.MI, €15.01)
Ternium (TX.N, $26.75)
Thyssen Krupp AG (TKAG.DE, €23.315)
United States Steel Corp. (X.N, $37.66)
Vallourec (VLLP.PA, €5.363)
Voestalpine (VOES.VI, €38.875)

Disclosure Appendix
Analyst Certification
I, Ravi Shankar, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
3-Year Price and Rating History for JSW Steel Ltd (JSTL.BO)

JSTL.BO Closing Price Target Price


Date (Rs) (Rs) Rating
27-May-14 122.76 54.00 U
21-Oct-14 117.57 60.00
30-Jul-15 84.74 54.00
19-Apr-16 133.23 160.00 O*
27-Jul-16 173.83 200.00
01-Feb-17 197.25 240.00
* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM
O U T PERFO RM

India Steel Sector 22


17 March 2017

3-Year Price and Rating History for Jindal Steel & Power Ltd (JNSP.BO)

JNSP.BO Closing Price Target Price


Date (Rs) (Rs) Rating
02-May-14 238.90 237.00 N
07-Aug-14 282.60 254.00
24-Sep-14 189.70 158.00 U
05-Nov-14 162.40 158.00 N
29-May-15 119.40 85.00 U
13-Aug-15 68.45 56.00
19-Apr-16 69.25 85.00 O*
22-Aug-16 85.90 110.00
12-Dec-16 73.45 96.00
15-Feb-17 89.75 110.00 N EU T RA L
U N D ERPERFO RM
06-Mar-17 126.00 150.00 O U T PERFO RM

* Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Steel Authority of India Ltd (SAIL.BO)

SAIL.BO Closing Price Target Price


Date (Rs) (Rs) Rating
29-May-14 87.90 30.00 U
10-Feb-16 37.85 27.00
19-Apr-16 44.45 35.00 *
* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

3-Year Price and Rating History for Tata Steel Ltd (TISC.BO)

TISC.BO Closing Price Target Price


Date (Rs) (Rs) Rating
14-May-14 452.15 260.00 U
21-May-15 342.90 210.00
11-Aug-15 246.90 180.00
19-Apr-16 335.00 440.00 O*
10-Oct-16 417.40 500.00
14-Nov-16 426.85 515.00
08-Feb-17 470.70 560.00
* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM
O U T PERFO RM

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India Steel Sector 23
17 March 2017

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Target Price and Rating


Valuation Methodology and Risks: (12 months) for JSW Steel Ltd (JSTL.BO)
Method: Our target price of Rs240 for JSW Steel is based on a P/B valuation, assigning a multiple of 2.0x to the FY18 book value of JSW Steel.
We use the P/B methodology instead of the traditional EV/EBITDA methodology, given the sustained downcycle in steel (resulting in
depressed EBITDA) and the high financial leverage in the industry. Our OUTPERFORM rating is based upon this target price and reflects
our expectation of a strong EBITDA growth in FY17/18 that should put concerns on JSW's debt on the back seat.
Risk: The risks to our target price of Rs240 and OUTPERFORM rating include: (1) steel price falling below our assumption in FY17/18; (2)
withdrawal of domestic trade barriers (safeguard, anti-dumping duty) would be a big negative as almost all of JSW Steel's EBITDA is
domestic; and (3) a rise in iron ore/coking coal costs in excess of what we have modeled-in.
Target Price and Rating
Valuation Methodology and Risks: (12 months) for Jindal Steel & Power Ltd (JNSP.BO)
Method: Jindal Steel & Power Ltd has mainly two business divisions: steel and power. Our target price of Rs150 is based on an SOTP (sum-of-the
parts) approach, where we value the steel business with a multiple of 7.5x EV/EBITDA (enterprise value/earnings before interest and
depreciation) on rolling four quarters and value the power division using a discounted cash flow methodology. We value overseas coal
projects at 7.5x EV/EBITDA (next 4 quarters). Our OUTPERFORM rating is based upon this target price and reflects our expectations of a
sustained strength in domestic steel prices driving a sharp recovery in steel EBITDA.

India Steel Sector 24


17 March 2017

Risk: The risks to our Rs150 target price and OUTPERFORM rating for Jindal Steel & Power Ltd include: (1) Fall in steel prices; (2) Adverse
resolution of the coal block bid case; (3) steady state merchant power rates settling below our assumption.
Target Price and Rating
Valuation Methodology and Risks: (12 months) for Steel Authority of India Ltd (SAIL.BO)
Method: Our target price of Rs35 for SAIL is based on a P/B valuation, assigning a multiple of 0.4x (50% lower than its last 5-Yr avg.) to the
blended book value of SAIL for the next 4 quarters. We use the P/B methodology instead of the traditional EV/EBITDA methodology, given
the sustained downcycle in steel (resulting in depressed EBITDA) and the high financial leverage in the industry. Our UNDERPERFORM
rating is based upon this target price and reflects our concerns on SAIL's poor profitability (struggling with negative/ near zero EBITDA so
far in FY17).
Risk: The risks to our Rs35 target price and UNDERPERFORM rating for SAIL include: (1) steel price increasing beyond our assumption in
financial year 2017; (2) coking coal price settling below expectations in FY17; (3) capacity expansion to 21.4 mn tonnes completing on
time and the market ascribing value to the same.
Target Price and Rating
Valuation Methodology and Risks: (12 months) for Tata Steel Ltd (TISC.BO)
Method: Our target price of Rs600 for Tata Steel is based on a P/B valuation, assigning a multiple of 1.5x to the last reported book value of Tata
Steel. We use the P/B methodology instead of the traditional EV/EBITDA methodology, given the sustained downcycle in steel (resulting
in depressed EBITDA) and the high financial leverage in the industry. Our OUTPERFORM rating is based upon this target price and
reflects our expectations of a sharp recovery in EBITDA due to rising domestic steel prices and improving steel spreads globally.
Risk: The risks to our Rs600 target price and OUTPERFORM rating for Tata Steel include: (1) steel prices failing to sustain current strength that
is needed to pass on the coking coal price hikes; (2) coking coal price settling at above expectations; and (3) higher-than-expected
pension liabilities in the European operations.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations
typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (JNSP.BO, JSTL.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of
Credit Suisse.
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Credit Suisse may have interest in (TTCH.BO, TAMO.BO, JNSP.BO, JSTL.BO, SAIL.BO, TISC.BO)
Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (JSTL.BO).
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This research report is authored by:
Credit Suisse Securities (India) Private Limited .........................................................................Ravi Shankar ; Neelkanth Mishra ; Prateek Singh
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India Steel Sector 25
17 March 2017

FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
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Credit Suisse Securities (India) Private Limited .........................................................................Ravi Shankar ; Neelkanth Mishra ; Prateek Singh
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India Steel Sector 26


17 March 2017

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