Research Notes Steel Sector Update (19 Nov 2013)

Maintain STAB ! o"tloo# on $ndian Steel sector

Weak demand and tight liquidity conditions have kept steel price hikes under check. The recent Rs 1,500-2,500 tonne hikes over !ept-"ct 201# have also not $een taken %ell $y traders and customers in the market. &s a result, manu'acturers have only rolled over prices 'or (ovem$er 201#. The 'estive season demand post the monsoon season has also not $een up-to e)pectations, $ut sharp *(R depreciation should, to some e)tent, $ene'it domestic prices, even i' regional prices 'all - given import parity. While +,- strength has $een one reason 'or the %eak *(R, %eak economic climate in *ndia is equally responsi$le. *n such an environment, steel mills %ould push volumes at a discount to imported steel, similar to .2/011 2discount o' Rs 2,000 tonne3. !teel prices 4 $oth 'lats and longs across geographies 4 have $een relatively sta$le. "n the other hand ra% material prices 4 primarily iron ore and scrap prices 4 have sho%n an up-tick. With 5hinese iron-ore inventories declining 1.506 2%eek-on-%eek3 to 7#.10 mn tones, $uying interest $y 5hinese mills is likely to have led to the iron-ore 'ines price increases. 8etallurgical 9 thermal coal prices have $een relatively sta$le %ith minimal changes. *n the commodities sector it is common %isdom to assume that stock prices %ill move together. :o%ever; %ithin our coverage universe, %hile %e have R<-+5< ratings on !&*= and >!W !teel, %e have a :"=- on Tata !teel. Tata !teel generates a$out ?06 o' its revenue 'rom its <uropean operations. While the 'irst signs o' an economic recovery are visi$le in <urope, amongst our coverage universe, Tata !teel %ould $e the $iggest $ene'iciary o' an economic recovery in <urope. 5urrently capacity utilisation o' Tata !teel@s <uropean $usiness is a$out 706. With an economic recovery around the corner, capacity utilisations are likely to improve, and %ith it, comes the $ene'it o' operating leverage.

Tata Steel 'eatures to $e our top-pick %ithin the *ndian !teel sector coverage universe, on %hich %e are having a %& ' (T( Rs 3)*). !&*= and >!W !teel do not have signi'icant e)posure to the <uropean region and there'ore the risk-re%ard 'or Tata !teel is $etter than the duo, in comparison. &dditionally, individual negative catalysts e)ist 'or !&*= and >!W !teel. SA$ has $een do%ngraded to R!'U+! (T( Rs ,,) 'rom :"=- earlier, on the $ack o' the company@s cost structure continuing to remain under pressure due to the initial proAect commissioning costs 9 higher provisioning 'or sta'' cost renegotiations. R!'U+! (T( Rs )22) has $een maintained on -S. Steel, as there appears to $e no near-term catalyst 'or the stock 9 capacity utiliBation %ould remain capped as progress on commissioning o' iron-ore mines in Carnataka is slo%er-than-e)pected. Diven import parity pricing 'or steel in *ndia, depreciation %eakness o' the *(R is generally 'ound $ene'icial 'or *ndian steel companies, %hose $ene'its have $een priced into our ratings.

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+e and o$r a##iliates& o##icers& directors& and em%lo"ees& incl$din( %ersons involved in t'e %re%aration or iss$ance o# t'is material& ma" #rom time to time 'ave 3lon(3 or 3s'ort3 %ositions in& act as %rinci%al in& and b$" or sell t'e sec$rities or derivatives t'ereo# o# com%anies mentioned 'erein* +e or an" o# t'e (ro$% or associate or s$bsidiar" com%anies a##iliated to $s and 4 or to an" o# o$r s'are'olders ma" #rom time to time solicit or %er#orm investment ban,in(& or ot'er services #or& an" com%an" mentioned in t'is doc$ment* +e do not $nderta,e to advise an" c'an(e in o$r vie)s e1%ressed in t'is doc$ment* +'ile )e )o$ld endeavor to $%date t'e in#ormation 'erein on a reasonable basis& Geojit BNP Paribas& its s$bsidiaries and associated com%anies& t'eir directors and em%lo"ees are $nder no obli(ation to $%date or ,ee% t'e in#ormation c$rrent* Also t'ere ma" be re($lator"& com%liance& or ot'er reasons t'at ma" %revent Geojit BNP Paribas and a##iliates #rom doin( so* Pros%ective investors and ot'ers are ca$tioned t'at an" #or)ard2loo,in( statements are not %redictions and ma" be s$bject to c'an(e )it'o$t notice* November 56 & 7859