Technically, TS need to sustain over 310-320 for further rally up to 360-385; otherwise it will face selling pressure and sustain below 294-285 may fall again to 270-255 zone.
Despite MIP, domestic steel companies may not be in a position to increase their prices sharply higher as there will be more supplies than demand in India itself.
Despite MIP, domestic steel companies may not be in a position to increase their prices sharply higher as there will be more supplies than demand in India itself.
Trading Idea: Tata Steel
CMP: 296
Either sell below 294 or on rise around: 306/310-320/326;
TGT: 270-255-238*-222-211-200 (1-3M)
TSL> 335
Note: Consecutive closing (3 days) above 335 for any reason, TS may further rally up to 360-385* and 450*-475-530*-580 in the near to long term (alternative bullish case scenario).
There may be counter reaction by the consumers/importers of steel against MIP and they have already approached HC in this issue, which may ultimately dragged to the SC level. MSME and other consumers of steel are also complaining of raw materials (steel) price hike which is affecting their business profitability/export etc and are demanding similar stimulus for their own industry also.
Going by the present & projected domestic demand supply dynamics, India has an excess capacity in steel without the import factor and in the near future may be continue to be in that state as various Govt & Pvt expansion plan is indicating a projected supply of 300 MT by 2025 from present level of around 100 MT.. Even if, all the budgetary proposal for infra/housing push will be actually implemented demand of steel is projected to grow around 6.5% ( 5.5-7.5%) CAGR, which may be far lower than the projected capacity by 2025.
In FY-15, domestic demand for finished steel was around 78 MT while supply (production) was around 92 MT, which has a oversupply of around 14 MT. Even if we assume, 10% growth in steel consumption over the next 10 years on the back of overall economic/industrial recovery and implementation of budgetary proposals, the demand for steel may increase by around 80 MT to 150-170 MT by 2026, which is far lower than projected 2025 production/supply of around 300 MT (50%).
In reality, 10% CAGR for steel consumption may be too much as India will probably grow by around 6.5-7% GDP (4.5-5% in the old series) and 6.5% may be the best case scenario (projected demand may be around 130 MT by 2026 against projected supply of 300 MT) !!
India's steel consumption is about 10% of China ( around 800 MT in 2014, which is almost 50% of global production of 1665 MT in 2014). China's total steel production capacity was around 1200 MT and it is planning to cut it by 100-150 MT over the next few years (gradually), keeping in view the debt of the steel mills with the banks & some likely adverse socio-economic fall out, although it may spend around $10 bln for rehabilitation.
Thus looking ahead, global/China as well as Indian demand-supply dynamics is bleak for steel as a commodity just like oil and prices may slump more. Chinese demand may also fall more rapidly than its planned/gradual production cut (if at all materialized).
India is itself a surplus steel producing country as of now and going ahead, may continue to be so.
Even after imposition of MIP and ASD, domestic steel producers may not be in a position in increase their prices significantly as demand itself is subdued and there may be more supply from domestic big producers, like Tata Steel/JSW/SAIL and from some smaller companies amid slight rise in prices.
Also, MIP covers around 80-85% of imported steel products and scraps were out of MIP purview. So, scarp imports may rise and we may see a drop in prices for long steel products. As par some analysts, this may be negative for Tata Steel & JSW Steel.
Domestic steel consumption in Feb'16 was around 6.84 MT which is down by 1.9% sequentially from Jan'16 but up by 4.7% on YOY basis (Feb'15). This was the first monthly fall since Nov'15, when steel consumption fall abruptly by 15.5% on MOM basis to 6 MT. Thus, underlying trend was not so good as expected for the heavily indebted domestic steel industry which is banking on local demand to pick up to spur growth and service its debt.
As par some calculation, domestic steel companies can increase price by around USD 105/MT for the MIP factor in the best case scenario.
Cost of steel in China: $295
Total additional duties : $238
----------------
Landed cost (W/O MIP) $533
Indian price: $428
-----------------
Difference (W/O MIP) $105
Landed cost of Chinese steel:
W/O MIP & ASD (Additional safeguard duty) : $401
With only MIP and no ASD: $594
W/O MIP but with ASD: $461
With both MIP & ASD: $684*
Max. Diff with landed cost & Indian price: $256 (684-428); if domestic steel makers increase price beyond $105/MT, then import may resume and if China will reduce price further by $50, then there will be limited scope for domestic price rise.
Analysts are expecting that in the best case scenario, even if there is $100/MT price increase (~25% from from Pre-MIP level) then it may translate an additional cash flow for Tata Steel & JSW Steel $500/700 mln on 5/7 MT of steel production over the next 6 months and that may translate an additional price of around Rs.40/200 from post MIP level (235/1050). In that scenario of $100/MT price hike, target price of Tata Steel & JSW Steel may be around 285 & 1250.
But on an average, most analysts are expecting a $40-50/T price hike (2700-3400/MT) and in that scenario, target price of Tata & JSW Steel may be around 275 & 1150.
In reality, the domestic steel companies were able to increase price only by around 4-5% for the retail customers as the long term contract with the OEM consumers do not allow any further price hike in the contract period.
Significant price hike of 25% as noted above, will only be possible if there is less supply than demand in India (without the China import factor). But, as of now there is no such visible increment in demand and more over, more supply is coming to the market. So, any price hike of domestic steel will be very gradual keeping in mind the interests of the consumers also.
But all these price hike assumptions are more of academic discussions as in reality, if such high regime of MIP/ASD will continue for long, there may be over-invoicing on steel imports and the difference will be paid in an offshore bank A/C, which will only help to generate black/unaccounted money. As China has significant overcapacity in steel as of now, its steel companies are desperate to dump at any price just to keep its cash-flow going for its debt servicing.
Infact, Indian Govt has also this over-invoicing concern and various investigation teams are looking into it. Govt may also impose additional duty on MIP to plug these loop holes !!
Govt may also decide to extend the MIP/ASD beyond 6 months to 24 months (until March'18).
Govt is also considering a comprehensive bail out package for the domestic steel industry like special CDR, bringing in strategic investor for debt laden steel firms like Essar steel (defaulters of bank loans) and persuading them to sell non-core assets to repay debts.
We all know that Tata Steel is persuading very hard to sell its long products division in UK/EU and a definitive agreement with Grey Bull may be announced by 31-st March'16. But the likely amount for this deal (Rs.3000-5000 cr) may be too small & insignificant in comparison with the overall consolidated debt of around Rs.77500 cr as on Q3FY16.
Moreover, in the current global scenario of excess supply, which is far outstripping the demand for steels (like oils), it may be very tough to find a good buyer for steel production mills and selling at distress price may be the only option to pay off huge debts (at least partially).
Currently, some EU nations (Scotland/UK) is showing interest for revival TS & other steel plants there only for saving some jobs keeping in view the forthcoming elections there by subsidizing with tax payer's money. (by subsidizing with Tax Payer's money) (by subsidizing with Tax Payer's money)
At Q3FY16, consolidated reported leverage for TS:
Debt/EBITDA= 77500/775.68 ~9.9x, which is well beyond tolerance level and consequently rating agency Moody's & also S&P downgraded TS credit rating citing continued downward pressure on international steel prices & subdued demand and TS's deteriorating leverage & coverage metrics and expecting that there will be no real improvement in the next 12-18 months.
TS has stable outlook for its long term corporate credit rating despite huge debt and lower sales/EBITDA, may be because of "TATA" brand and backing of "TATA GROUPS/SONS" (too big to fall concept). Any other low profile corporate group with such deteriorating operating leverage may be assigned as negative outlook.
Even on a standalone basis, TSI's adjusted debt/EBITDA was around 6.5x at Q3FY16, which is also far above ideal leverage of below 2x.
For TS, the only hope is now in India after imposition of MIP and the EU operations are virtually stand stilled as significant higher fixed operating costs are involved there (structural problem apart from China imports/FX headwinds).
Most of TS's debt was due to the $12.9 bln leveraged buyout of Corus in 2007. At that time $6.1 bln debt was raised in Corus books (TSE) and the majority of the rest was funded by FX debt as TS's equity contribution (Indian books).
But for TS, this Corus acquisition did not pay any fruit (inadequate return) and moreover it required an ongoing funding support. The FX debt has continued to swell amid adverse currency volatility/exchange rates. In FY-14 & 15, the reported increase in the value of debts due to INR depreciation amounted to around Rs.828 & 933 cr.
For TS, the disposal of non-core assets is also being offset by capex requirements for its forthcoming Odisha plant. Although, large assets write downs (impairment of Rs.6500 cr in FY-15) is near its peak, it may also be offset by growing depreciation charges, once Kalinga Nagar Plant (Odisha) is commissioned fully in FY-16. Thus bottom line of TS may be continue in pressure along with lack of free operating cash-flow in the foreseeable future.
Q3FY16 result of TS was much below street estimates (all Rs.in cr)
Consolidated Q3FY16 PAT was at (-) 2127.23 against estimate of (-) 977.6 (YOY: 157.11; QOQ: 1528.71).
Exceptional loss for Q3FY16 was reported as (-) 712 and exceptional gain for Q2FY16 was at 370 (for DMF provision reversal).
Q3FY16 EBITDA was at 775.68 against expectation of 1019 (YOY: 3077.39; QOQ: 1830.49).
Q3 OPM was at 2.77% against estimate of 3.5% (YOY: 9.15%; QOQ: 6.25%)
One time exceptional EBITDA loss in Q3FY16 was at (-) 198 (SGX subsidiary).
Q3FY16 EBITDA/T was at (-) 31 USD against expectation of (-) 25 USD (Consolidated)
On standalone basis Q3 EBITDA/T was at Rs.6375/T, whereas estimate was at 6750/T.
Q3FY16 EPS was at (-) 22.38 (YOY: 1.16; QOQ: 15.31)
Q3FY16 standalone PAT at 452.82 (YOY: 880.64; QOQ: 2522.92)
Q3FY16 EBITDA at 1497.51 (YOY: 3391.36; QOQ: 1861.57)
Q3FY16 OPM at 5.49% (YOY: 34.26%; QOQ: 19.53%)
Q3FY16 EPS at 4.21 (YOY: 8.61; QOQ: 25.53)
In Q2FY16, there was exceptional other income of 2932.69 & loss of 1321.51 (net gain 1611.18).
Q3FY16 Consolidated TTM EPS (-) 58.53
Consolidated cumulative EPS for the last five years at 71.72 (FY:2011-15)
Avg. EPS for the last five years 14.34 (golden period of global steel industry ??)
In FY-15, domestic demand for finished steel was around 78 MT while supply (production) was around 92 MT, which has a oversupply of around 14 MT. Even if we assume, 10% growth in steel consumption over the next 10 years on the back of overall economic/industrial recovery and implementation of budgetary proposals, the demand for steel may increase by around 80 MT to 150-170 MT by 2026, which is far lower than projected 2025 production/supply of around 300 MT (50%).
In reality, 10% CAGR for steel consumption may be too much as India will probably grow by around 6.5-7% GDP (4.5-5% in the old series) and 6.5% may be the best case scenario (projected demand may be around 130 MT by 2026 against projected supply of 300 MT) !!
India's steel consumption is about 10% of China ( around 800 MT in 2014, which is almost 50% of global production of 1665 MT in 2014). China's total steel production capacity was around 1200 MT and it is planning to cut it by 100-150 MT over the next few years (gradually), keeping in view the debt of the steel mills with the banks & some likely adverse socio-economic fall out, although it may spend around $10 bln for rehabilitation.
Thus looking ahead, global/China as well as Indian demand-supply dynamics is bleak for steel as a commodity just like oil and prices may slump more. Chinese demand may also fall more rapidly than its planned/gradual production cut (if at all materialized).
India is itself a surplus steel producing country as of now and going ahead, may continue to be so.
Even after imposition of MIP and ASD, domestic steel producers may not be in a position in increase their prices significantly as demand itself is subdued and there may be more supply from domestic big producers, like Tata Steel/JSW/SAIL and from some smaller companies amid slight rise in prices.
Also, MIP covers around 80-85% of imported steel products and scraps were out of MIP purview. So, scarp imports may rise and we may see a drop in prices for long steel products. As par some analysts, this may be negative for Tata Steel & JSW Steel.
Domestic steel consumption in Feb'16 was around 6.84 MT which is down by 1.9% sequentially from Jan'16 but up by 4.7% on YOY basis (Feb'15). This was the first monthly fall since Nov'15, when steel consumption fall abruptly by 15.5% on MOM basis to 6 MT. Thus, underlying trend was not so good as expected for the heavily indebted domestic steel industry which is banking on local demand to pick up to spur growth and service its debt.
As par some calculation, domestic steel companies can increase price by around USD 105/MT for the MIP factor in the best case scenario.
Cost of steel in China: $295
Total additional duties : $238
----------------
Landed cost (W/O MIP) $533
Indian price: $428
-----------------
Difference (W/O MIP) $105
Landed cost of Chinese steel:
W/O MIP & ASD (Additional safeguard duty) : $401
With only MIP and no ASD: $594
W/O MIP but with ASD: $461
With both MIP & ASD: $684*
Max. Diff with landed cost & Indian price: $256 (684-428); if domestic steel makers increase price beyond $105/MT, then import may resume and if China will reduce price further by $50, then there will be limited scope for domestic price rise.
Analysts are expecting that in the best case scenario, even if there is $100/MT price increase (~25% from from Pre-MIP level) then it may translate an additional cash flow for Tata Steel & JSW Steel $500/700 mln on 5/7 MT of steel production over the next 6 months and that may translate an additional price of around Rs.40/200 from post MIP level (235/1050). In that scenario of $100/MT price hike, target price of Tata Steel & JSW Steel may be around 285 & 1250.
But on an average, most analysts are expecting a $40-50/T price hike (2700-3400/MT) and in that scenario, target price of Tata & JSW Steel may be around 275 & 1150.
In reality, the domestic steel companies were able to increase price only by around 4-5% for the retail customers as the long term contract with the OEM consumers do not allow any further price hike in the contract period.
Significant price hike of 25% as noted above, will only be possible if there is less supply than demand in India (without the China import factor). But, as of now there is no such visible increment in demand and more over, more supply is coming to the market. So, any price hike of domestic steel will be very gradual keeping in mind the interests of the consumers also.
But all these price hike assumptions are more of academic discussions as in reality, if such high regime of MIP/ASD will continue for long, there may be over-invoicing on steel imports and the difference will be paid in an offshore bank A/C, which will only help to generate black/unaccounted money. As China has significant overcapacity in steel as of now, its steel companies are desperate to dump at any price just to keep its cash-flow going for its debt servicing.
Infact, Indian Govt has also this over-invoicing concern and various investigation teams are looking into it. Govt may also impose additional duty on MIP to plug these loop holes !!
Govt may also decide to extend the MIP/ASD beyond 6 months to 24 months (until March'18).
Govt is also considering a comprehensive bail out package for the domestic steel industry like special CDR, bringing in strategic investor for debt laden steel firms like Essar steel (defaulters of bank loans) and persuading them to sell non-core assets to repay debts.
We all know that Tata Steel is persuading very hard to sell its long products division in UK/EU and a definitive agreement with Grey Bull may be announced by 31-st March'16. But the likely amount for this deal (Rs.3000-5000 cr) may be too small & insignificant in comparison with the overall consolidated debt of around Rs.77500 cr as on Q3FY16.
Moreover, in the current global scenario of excess supply, which is far outstripping the demand for steels (like oils), it may be very tough to find a good buyer for steel production mills and selling at distress price may be the only option to pay off huge debts (at least partially).
Currently, some EU nations (Scotland/UK) is showing interest for revival TS & other steel plants there only for saving some jobs keeping in view the forthcoming elections there by subsidizing with tax payer's money. (by subsidizing with Tax Payer's money) (by subsidizing with Tax Payer's money)
At Q3FY16, consolidated reported leverage for TS:
Debt/EBITDA= 77500/775.68 ~9.9x, which is well beyond tolerance level and consequently rating agency Moody's & also S&P downgraded TS credit rating citing continued downward pressure on international steel prices & subdued demand and TS's deteriorating leverage & coverage metrics and expecting that there will be no real improvement in the next 12-18 months.
TS has stable outlook for its long term corporate credit rating despite huge debt and lower sales/EBITDA, may be because of "TATA" brand and backing of "TATA GROUPS/SONS" (too big to fall concept). Any other low profile corporate group with such deteriorating operating leverage may be assigned as negative outlook.
Even on a standalone basis, TSI's adjusted debt/EBITDA was around 6.5x at Q3FY16, which is also far above ideal leverage of below 2x.
For TS, the only hope is now in India after imposition of MIP and the EU operations are virtually stand stilled as significant higher fixed operating costs are involved there (structural problem apart from China imports/FX headwinds).
Most of TS's debt was due to the $12.9 bln leveraged buyout of Corus in 2007. At that time $6.1 bln debt was raised in Corus books (TSE) and the majority of the rest was funded by FX debt as TS's equity contribution (Indian books).
But for TS, this Corus acquisition did not pay any fruit (inadequate return) and moreover it required an ongoing funding support. The FX debt has continued to swell amid adverse currency volatility/exchange rates. In FY-14 & 15, the reported increase in the value of debts due to INR depreciation amounted to around Rs.828 & 933 cr.
For TS, the disposal of non-core assets is also being offset by capex requirements for its forthcoming Odisha plant. Although, large assets write downs (impairment of Rs.6500 cr in FY-15) is near its peak, it may also be offset by growing depreciation charges, once Kalinga Nagar Plant (Odisha) is commissioned fully in FY-16. Thus bottom line of TS may be continue in pressure along with lack of free operating cash-flow in the foreseeable future.
Q3FY16 result of TS was much below street estimates (all Rs.in cr)
Consolidated Q3FY16 PAT was at (-) 2127.23 against estimate of (-) 977.6 (YOY: 157.11; QOQ: 1528.71).
Exceptional loss for Q3FY16 was reported as (-) 712 and exceptional gain for Q2FY16 was at 370 (for DMF provision reversal).
Q3FY16 EBITDA was at 775.68 against expectation of 1019 (YOY: 3077.39; QOQ: 1830.49).
Q3 OPM was at 2.77% against estimate of 3.5% (YOY: 9.15%; QOQ: 6.25%)
One time exceptional EBITDA loss in Q3FY16 was at (-) 198 (SGX subsidiary).
Q3FY16 EBITDA/T was at (-) 31 USD against expectation of (-) 25 USD (Consolidated)
On standalone basis Q3 EBITDA/T was at Rs.6375/T, whereas estimate was at 6750/T.
Q3FY16 EPS was at (-) 22.38 (YOY: 1.16; QOQ: 15.31)
Q3FY16 standalone PAT at 452.82 (YOY: 880.64; QOQ: 2522.92)
Q3FY16 EBITDA at 1497.51 (YOY: 3391.36; QOQ: 1861.57)
Q3FY16 OPM at 5.49% (YOY: 34.26%; QOQ: 19.53%)
Q3FY16 EPS at 4.21 (YOY: 8.61; QOQ: 25.53)
In Q2FY16, there was exceptional other income of 2932.69 & loss of 1321.51 (net gain 1611.18).
Q3FY16 Consolidated TTM EPS (-) 58.53
Consolidated cumulative EPS for the last five years at 71.72 (FY:2011-15)
Avg. EPS for the last five years 14.34 (golden period of global steel industry ??)
Last five years total accumulated loss of TS is around (-) 6984.21 (Consolidated)
Standalone Q3FY16 TTM EPS : 50.09
Projected FY-16-18 EPS: 54.70-62.95-72.55
Average PE: 5 (as TS may be in net loss on consolidated basis for expected weak EU & South East Asia operations and consolidated EPS may be in negative for the next 4-5 years from the present TTM level of (-) 58.53)
As par BG metrics & current market scenario:(Standalone basis):
Present median valuation of Tata Steel may be around: 270 (Q3FY16/TTM)
Projected fair valuations might be around: 280-300-322 (FY:16-18/FWD)
Standalone Q3FY16 TTM EPS : 50.09
Projected FY-16-18 EPS: 54.70-62.95-72.55
Average PE: 5 (as TS may be in net loss on consolidated basis for expected weak EU & South East Asia operations and consolidated EPS may be in negative for the next 4-5 years from the present TTM level of (-) 58.53)
As par BG metrics & current market scenario:(Standalone basis):
Present median valuation of Tata Steel may be around: 270 (Q3FY16/TTM)
Projected fair valuations might be around: 280-300-322 (FY:16-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| TATASTEEL | 50.09 | 686.39 | 5 | 261.14 | 273.94 | 267.54 | 272.28 | 299.63 |
| TATASTEEL | 54.7 | 751.6 | 5 | 272.89 | 286.27 | 279.58 | 272.28 | 299.63 |
| TATASTEEL | 62.95 | 823.5 | 5 | 292.75 | 307.10 | 299.92 | 272.28 | 299.63 |
| TATASTEEL | 72.55 | 901.25 | 5 | 314.28 | 329.68 | 321.98 | 272.28 | 299.63 |
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