A rollback of hefty export duties imposed on steel and steelmaking raw materials is a sentimental booster, but it is unlikely to have a significant impact on steel realisations, given India export price is at a steep discount to domestic HRC price, analysts said. Among metals & mining stocks, NMDC is seen as the key beneficiary of the rollback, they said.
The removal of export duty is a welcome move for the steel producers, but we do not see any benefit in the near term, said Kotak Institutional Equities.
The government last week reversed export duty on iron ore with grades lower than 58 per cent to nil while export duty on iron ore with grades higher than 58 per cent was cut to 30 per cent.
Export duty on pellets was rolled back to nil while export duty on pig iron, hot-rolled/cold-rolled alloy and non-alloy flat steel products of 600 mm or more in width got slashed to nil.
Besides, the government reinstated import duty on coking coal, anthracite coal and ferronickel to 2.5 per cent from nil earlier. Import duty on coke and semi coke was also reinstated to 5 per cent from nil.
"Current export prices are at a significant discount to domestic prices due to the deterioration of global steel markets in the last six months. The reduction in export duty on iron ore should allow domestic miners to increase prices given the increase in export parity prices. We see NMDC as the key beneficiary of the government action, and raise its earnings and fair value to Rs160 from Rs 130," said Kotak Institutional Equities.
The brokerage, which has increased its NMDC Ebitda estimates by 9-38 per cent for FY23-FY25, said steel exports are unlikely to increase after the removal of duty and does not see any near-term benefit to steel producers.
"Nonetheless, the removal of duty opens the export market ahead of capacity expansions in FY2024-25E. We have increased Fair Value for steel producers as we roll forward to September 2024E but remain cautious. SAIL remains our top SELL," it said.
ICICI Securities said that a significant sector headwind has been removed, but the Street would be wary of the likely imposition of duties in future, if prices are sharply up. It perceives the event to be a sector re-rating, and hence, raised the valuation multiples of all ferrous stocks under its coverage by 10 per cent, corresponding to similar profitability level, as pre-export duty.
The brokerage has raised target for Jindal Steel & Power (JSPL) to Rs 605 from Rs 550), Jindal Stainless to Rs 210 from Rs 180 and Shyam Metalics to Rs 425 from Rs 355). It has upgraded NMDC to 'Add' from 'Reduce' with a revised target of Rs 120 from Rs102 and SAIL to 'Reduce' from 'Sell' with a revised target of Rs 75 from Rs 65 earlier. It remained 'Sell' on JSW Steel with a revised target of Rs 550 from Rs 475.
"We believe the roll back of export duty is unlikely to have a significant impact on steel realisations given India export price is at a steep discount to domestic HRC price. Export volumes are expected to pick up given low base – exports for October have declined 66 per cent YoY while year-to-date exports have declined 55 per cent. A 20 per cent increase in finished steel inventory from March-September will likely result in higher exports, as steel companies start chasing global markets. Improved competitiveness of India against Asian countries post rollback of export duty," said JM Financial in a note.
The brokerage said Pellet exports are likely to pick up post removal of export duties, which could lead to demand uptick for iron ore. "Consequently, price outlook for iron ore should likely improve (positive NMDC). We continue to maintain our positive stance on the sector with Tata Steel (underperformed recently)/JSPL remaining our preferred picks in the ferrous space," it said.
Nomura India said the decline in steel export price for India has largely been in line with that of its peers and largely led by the slowdown in China demand. It does not expect a significant uptick in export prices following the discontinuation of export duty on steel.
It said discount of NMDC’s iron ore prices to global iron ore prices had widened to 63.5 per cent post imposition of export duty against 53.5 per cent in the pre-export duty period of January-May average.
With the removal of export duties, it expects this discount to shrink, returning to pre-export duty levels. Nomura estimates a Rs 480 per tonne increase in NMDC’s iron ore price as a result of the removal of export duty.
"With downside protection to steel prices and potential increase in raw material prices, we estimate a spread benefit of Rs 464 per tonne due to change in duties announced. In our assessment, this is likely to translate in 5 per cent EPS (standalone) increase for JSW Steel for FY24F," it said.
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