Correction in steel stocks could be a buying opportunity

India’s steel market is out of step with global trends.

Global demand is weak with China at a huge supply surplus to its domestic demand, pushing down global steel prices.

India’s domestic demand for steel is strong, given the continuing infrastructure push and is likely to accelerate as urbanisation improves, and the auto sector continues to grow alongside the infrastructure push.

However, India’s steel majors have seen a soft Q2FY25 with average prices down by Rs 3,000-5,000 per tonne Q-o-Q.

Margins may have been sustained to some extent by soft input prices, including lower coal and lower ore prices, which also led to lower working capital requirements.

Even so, spreads would have been under pressure and there was likely operating profit margin compression of about Rs 1,500 per tonne Q-o-Q.

Volumes are likely to be muted in a seasonally weak quarter.

But in the long run, India’s steel sector is expected to outpace real GDP growth with 8-10 per cent annual growth over FY24-30 which would be much higher than GDP growth over that period.

Indian steel capacity is expanding quickly with every steel major committed to capex.

Global weakness is due to poor China demand.

Hence Chinese steel exports are flooding markets.

In January-August 2024, Chinese exports rose by 19 per cent Y-o-Y in volumes to 70 million tonnes.

Domestic iron ore production is expected to grow in the next few years from 278 million tonnes in FY24 to 400 million by FY30.

Apart from higher ore mining, India needs beneficiation plants to enable better ore quality.

Domestic crude steel production for eight months of CY24 has risen 7.4 per cent Y-o-Y to 98.7 million tonnes.

India is the fastest growing steel producer globally and its  global market share is at 8 per cent, second to China.

Steel demand has a strong correlation with GDP growth and post-FY21, the steel sector has outpaced broad GDP, recording over 8 per cent CAGR.

Apart from government-driven infrastructure construction, steel sector growth is directly linked with the rate of urbanisation.

India’s pace of urbanisation may be accelerating with the National Institute of Urban Affairs estimating urban population would hit 590-600 million by 2030.

Demands on urban transportation (metros), urban infrastructure, and construction will further raise steel demand.

Crude steel installed capacity would hit 300 million tonnes by FY30-31 with 210-220 million tonnes of steel likely to be produced and 190-210 million tonnes consumed locally by FY30.

The top five players including JSW Steel, Tata Steel, SAIL, JSPL and ArcelorMittal Nippon Steel hold a cumulative 52-54 per cent market share by FY30.

JSW and JSPL have the best return on equity.

JSW Steel will hold 50 million tonnes of domestic capacity (51.5 million tonnes consolidated) by FY30.

JSPL has the strongest balance sheet of the majors and it has reduced net debt by about 70 per cent from Rs 34,300 crore in FY19 to Rs 10,500 crore in Q1 FY25.

Its net debt to operating profit is one time, much better than JSW’s 3 times and Tata’s 3.4 times in Q1FY25.

There is a case for suggesting better valuations across the sector as demand accelerates.

Most steel majors will also deliver better return ratios once their capex completes.

Given robust domestic demand and capacity adds, prospects look good in the long term.

Under the circumstances, the current weakness in the cycle could be a good entry point for the patient investor.

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