As steel stocks falter, a silver lining for investors

Stocks of Indian steel companies are reeling from pricing pressure that is partly blamed on cheap imports.

The stocks have declined up to 9 per cent on the NSE in one month, likely allowing investors an opportunity to use the correction to enter the pack as pricing pressure eases.

"In steel or any other commodity, if prices or spreads are nearing their bottom, it can be an opportune time to invest in those stocks.

"In India, domestic fundamentals such as steel consumption remain robust, hence one can take fresh positions in these counters,” said Amit Dixit, an analyst at ICICI Securities.

Domestic steel spread is at Rs 24,330 per tonne (the lowest since March 2024) and the price of hot rolled coil (HRC) is at Rs 51,370 per tonne (the lowest since December 2020), said Dixit.

The Nifty Metal index has fallen by 1.01 percent in the past month, while the NSE Nifty 50 has risen by 0.17 per cent, according to data from ACE Equity.

APL Apollo Tubes, which makes structural steel tubes, has dropped by 8.89 per cent, Steel Authority of India (SAIL) by 7.4 per cent, NMDC by 3.89 per cent, Jindal Stainless by 2.97 per cent, and Tata Steel by 2.41 per cent in one month.

The weakness, analysts said, followed China and Vietnam dumping their steel produce in the Indian market.

In the first four months of FY25, net steel imports rose 57 per cent year-on-year (Y-o-Y) to 2.7 mega tonnes (mt), while exports fell by 46 per cent Y-o-Y to 1.7 mt.

Chinese imports rose 193 per cent Y-o-Y to 0.85 mt, taking the country’s share in India’s overall steel imports to 32 per cent from an average of 16 per cent in the past four years.

Vietn­amese steel imports, on the other hand, were down by 60 per cent Y-o-Y, according to data from ICICI Securities. India’s Directorate Gene­ral of Trade Remedies (DGTR) rece­ntly launched an anti-dumping investigation of Vietnamese HRC imports. Vietnam has a smaller share in imports but India’s move is a step in the right direction, said analysts.

“The investigations should engulf countries like China, whose share in Indian imports has gone up markedly.

"Further, there is hardly any export of steel from India to China, thus ruling out any benefit to Indian steel companies,” said analysts at ICICI Securities in a report.

According to the brokerage, profitability in China’s HRC and rebar products is at their lowest in the past 15 years (HRC at 2.5 per cent and rebar at 0.08 per cent).

Hence, the brokerage said China’s exports seem unfairly priced and do not cover even the variable cost of production.

Bro­kerage Motilal Oswal estimates that while steel prices might remain subdued in the short term, there is pote­ntial for improvement in the second half of FY25.

The Supreme Court last week held that state governments had the authority to impose additional taxes on minerals, retrospectively, with effect from April 1, 2005.

Analysts expect the verdict will have little impact and the final cost will be passed on to steel consumers.

“On a prospective basis, the Jharkhand government recently proposed an additional cess of Rs 100 per tonne on coal and iron ore and Rs 70 per tonne on bauxite.

"Assuming all state governments follow this, incremental impact on companies’ ebitda shall be 2–3 per cent, which is not alarming,” said Ashish Kejriwal and Jyoti Singh, analysts with Nuvama Institutional Equities, in a report, referring to earnings before interest, taxes, depreciation, and amortisation.

Analysts predict NMDC can pass on most past liabilities arising from the ruling to consumers due to the availability of pass-through clauses on any regulatory cess.

Hindalco, on the flip side, has not received any tax demand yet, whereas the disclosed contingent liability of Tata Steel could include interest and penalties, which are not admissible, analysts at Kotak Institutional Equities pointed out.

“The demand raised by states under different laws could be further litigated based on merits on a case-to-case basis,” it added.

Against this, ICICI Securities has ‘buy’ recommendations for JSW Steel, Jindal Steel, Jindal Stainless, and Tata Steel.

It has ‘add’ for NMDC and ‘sell’ for SAIL.

Motilal Oswal has a ‘buy’ rating for Jindal Steel, JSW Steel and NMDC and ‘neutral’ on Tata Steel and Vedanta.

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