Sector Update | 23 May 2022

Metals

Metals
Companies covered Pointing the gun in wrong direction, sector under review
Tata Steel To tackle inflation, govt curb steel prices, without addressing rising input
JSW Steel
 Govt raises export tax on most of steel products, iron ore and pellets (see Exhibit 1)
Jindal Steel and Power while reducing customs duty on Coking coal, PCI, Anthracite Coal and Coke.
SAIL  The measure does not address 2 things (a) elevated international coking coal prices ,
NMDC (b) how will the customers of steel (autos, real estate, infra, etc) pass on the benefit to
end consumers. Will it lead to lower price of housing, automobiles, construction? We
don’t think so.
 While we believe and hope this is a temporary measure, but we note that this can
impact the valuation, ability to invest in capacity growth in long term. We are putting
the sector on UNDER REVIEW and wait for the management for all steel companies to
elaborate their thoughts and strategies over the next few days on how to deal with the
current situation.

Impact of the export duty depends on course of action taken by companies

 While steel companies can continue to export by paying 15% export duty and
take a hit on their P&L to the extent of exports, but that can protect the
domestic market from a significant price correction.
 However, steel producers have to ensure no dumping happens in domestic
market. If discipline is no maintained and material is dumped in domestic
market, steel prices could correct sharply.
 Alternatively, steel producers can resort to lower production if these measures
are not withdrawn soon. The oversupply of steel in domestic market can be
arrested to that extent.

Valuation and view

 We believe the measure would have produced the desired result if implemented
a year ago when the steel prices were at similar level but coal was about 20%
lower and profitability was at near peak. The industry would have the capacity to
absorb the impact without sacrificing its capex plans, which is not possible
today.
 We feel the measure is a year late and without any leeway to the existing
exports contracts to export sans export duty. The current measure will impact
the ability and will of the companies to continue with their long term capex
plans and will only commission the capacities where capex has been significantly
committed. We believe companies are likely to commission 17.5mt in the next
3 yrs and may not embark on further capex
 Steel stocks have almost corrected between 20-40% from their 52 week highs
due to rising coal prices, falling demand and weak international prices.
 Reopening of china with stimulus can alter the current landscape of steel
demand and prices globally.
 Steel stocks under our coverage are currently trading in the range of 4-5x FY23E
EV/EBITDA. The industry is coming off from their best times in terms of
profitability and is heading into a turbulent monsoon period where domestic
demand is down, chinese demand is impacted due to Covid-19, coal prices are
relentlessly high and we are heading into the monsoon season in next month.

23 May 2022 1
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 We put the sector UNDER REVIEW and will wait for the comments from the
management before taking a view on the stocks

Near term stock correction is imminent; ramifications are wide, we believe

 Due to various measures announced by the government, near term correction in
steel stocks is imminent. We believe the ramification of such a measure taken by
the government will be felt widely across all parts of the industry.
 We would wait for the industry to articulate how they plan to navigate these
circumstances before taking a view on the stocks.
 We are surprised that while both steel and non-ferrous have made supernormal
profits in the recent commodities bull-run, the government has singled out the
steel sector.
 In our view, the government should have prepared a clear plan to identify and
support the MSMEs if they were impacted at all by the rising commodities
prices. Instead; making steel exports nearly unviable will impact the cash flows
of entire steel industry and there could be difficulty in achieving government’s
vision of 300mt steel capacity in India by 2030.
 We also hope with the expected correction in steel prices, the government will
monitor that consumers of steel will also reduce prices and aid in government’s
aim of reducing inflation. If this is not monitored, the entire effort of the
government will not yield desired results and this action will only lead to transfer
of profits from steel companies to the steel consuming sectors like automotive,
real estate, EEPC, etc.
 India is a steel surplus country where companies were encouraged to set up
capacities for exports. India exported about 13.5mt finished steel in FY22 and
additional 5mt semi-finished. It also imported about 4.8mt finished steel in FY22.
 If the steel producers defer any further capacity addition other than those
committed, then we estimate India could turn net importer of steel in the next
4-5 years with incremental USD5b+ steel imports every year in addition to
USD5b steel already imported in FY22.
 we also note that this policy decision will result in many steel players re-thinking
their plans to increase capacity to 40-50mt by CY25-30. This is also likely to
complicate the divestment of Nagarnar Steel plant of NMDC and RINL.
 Leaving exports of slabs and billets outside the ambit of export duty also implies
that while the companies are free to export, semi-finished steel, they retain the
corresponding carbon emission back in India, which works against the aim of the
government to reduce carbon emission in the country.
 We hope and believe that this is a short term measure and should be reversed
once inflation is under control and government could highlight a road map to
normalcy if it plans so.

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Story in charts
nd
Exhibit 1: Summary of changes to duty rates w.e.f 22 May 2022
Import Duty
Product Earlier Revised
All Coals including Coking and Non-coking / PCI 2.5% 0%
Coke 5% 0%
Ferro-Nickel 2.50% 0%
Export Duty
Product (non alloy steel) Earlier Revised
Iron Ore (All-Grades) 30% (only low grade fines) 50%
Pellet 0% 45%
Pig 0% 15%
HR Coil, Sheets and Plates (wide , >600mm) 0% 15%
CR (wide , >600mm) 0% 15%
Coated / Tinplate (wide , >600mm) 0% 15%
Wire Rod / TMT in Coil 0% 15%
Bars 0% 15%
SS – Flats (wide , >600mm) 0% 15%
SS – Longs 0% 15%
Wire Rod 0% 15%
Source: Ministry of Finance, MOSL

Exhibit 2: HRC Export parity - Domestic Prem/(Disc) vs Exhibit 3: HRC Import parity - Domestic Prem/(Disc) vs
Exports (INR/t) Imports (INR/t)
13,000 8,000

8,000 3,000
-2,000
3,000
-7,000
-2,000
-12,000
-7,000 -17,000
-12,000 -22,000
May'21

Apr'22
May'22

May'21

Apr'22
May'22
Aug'21

Dec'21

Mar'22

Aug'21

Dec'21
Sep'21

Jan'22
Feb'22

Sep'21

Jan'22
Feb'22
Mar'22
Jul'21

Oct'21

Jul'21

Oct'21
Jun'21

Nov'21

Jun'21

Nov'21

Source: SteelMint, MOFSL Source: SteelMint, MOFSL

Exhibit 4: Domestic Iron ore prices (INR/t) Exhibit 5: Premium HCC prices (USD/t)

10,000 800
8,000 600

6,000 400

4,000 200

2,000 0
Apr'21
Dec'20

Feb'21

Aug'21

Apr'22
Dec'21

Feb'22
Oct'20

Oct'21
Jun'21

May'14

May'16

May'18

May'20

May'22
Jan'13
Sep'13

Jan'15
Sep'15

Jan'17
Sep'17

Jan'19
Sep'19

Jan'21
Sep'21

Source: SteelMint, MOFSL Source: SteelMint, MOFSL

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Exhibit 6: India HRC spreads (INR/t) dipping below long term averages now
HRC Spread Avg Spread last 7 yrs Domestic HRC Spread (USD/t)
800

650

500

350

200

Apr'14
Aug'14

Apr'15
Dec'14

Aug'15

Apr'16
Dec'15

Aug'16

Apr'17
Dec'16

Aug'17

Apr'18
Dec'17

Aug'18

Apr'19
Dec'18

Aug'19

Apr'20
Dec'19

Aug'20

Apr'21
Dec'20

Aug'21

Apr'22
Dec'21
Source: SteelMint, MOSL

Exhibit 7: While large growth capex has been committed by steel companies

262

198

79

Tata
SAIL
JSPL

JSW
Source: MOFSL, Company

Exhibit 8: India Steel Production/EXIM/Consumption (in mt) – India is a net exporter by design now
FY19 FY20 FY21 FY22
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Crude Steel Prodn 26.2 26.1 26.6 27.3 27.3 27.1 27.7 27.0 17.3 26.7 29.5 29.9 27.8 29.4 30.8 31.8
Finished Steel Prodn 24.0 24.1 25.1 26.1 25.7 24.9 25.7 25.7 14.0 25.2 28.1 28.4 26.3 27.0 29.7 29.8
Imports (incl. Semis) 2.1 2.4 2.2 2.1 1.9 2.3 1.6 1.3 1.3 0.8 1.3 1.6 1.2 1.3 1.1 1.3
Imports (excl. Semis) 1.9 2.1 2.0 1.9 1.8 2.2 1.5 1.3 1.2 0.8 1.2 1.5 1.2 1.2 1.1 1.2
Exports (incl. Semis) 1.9 2.4 1.7 1.8 1.6 3.2 3.9 2.5 5.5 5.4 2.8 3.6 4.8 6.0 3.7 3.9
Exports (excl. Semis) 1.4 1.8 1.1 1.3 1.1 2.6 2.8 1.8 3.3 3.3 1.8 2.5 3.6 4.2 2.6 3.2
Net Imports (ex. Semis) 0.5 0.3 0.9 0.5 0.7 -0.4 -1.3 -0.6 -2.1 -2.5 -0.5 -0.9 -2.4 -3.0 -1.5 -2.0
Consumption 23.6 24.1 24.1 25.7 24.9 25.6 24.4 23.3 12.2 24.3 28.9 29.4 25.3 24.1 26.5 28.3
Source: MOFSL, JPC

23 May 2022 4
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Exhibit 9: Global steel – comparative valuations

M-cap P/E (x) EV/EBITDA (x) P/B (x) RoE (%)
CY21/ CY22/ CY23/ CY21/ CY22/ CY23/ CY21/ CY22/ CY23/ CY21/ CY22/ CY23/
Company USD m
FY22 FY23 FY24 FY22 FY23 FY24 FY22 FY23 FY24 FY22 FY23 FY24
India
Tata* 18,357 3.6 8.2 6.6 3.1 5.3 4.3 1.3 1.2 1.1 44.6 15.1 17.0
JSW* 19,591 6.7 9.7 8.7 5.6 6.7 5.6 2.3 2.0 1.7 39.9 21.7 20.6
JSP* 6,272 5.2 9.5 4.4 3.2 4.5 2.4 1.2 1.1 0.9 25.6 11.9 21.7
SAIL* 4,403 3.2 12.3 3.6 2.9 6.7 2.8 0.7 0.6 0.5 21.5 5.2 16.1
Japan
JFE 7,482 3.3 5.2 5.7 4.8 6.2 6.3 0.5 0.4 0.4 15.5 8.7 7.8
Nippon Steel 16,041 3.9 6.0 6.1 4.7 6.1 5.9 0.6 0.6 0.6 18.1 10.4 9.0
Kobe Steel 2,142 4.9 6.0 5.2 5.3 6.0 5.5 0.3 0.3 0.3 7.2 5.8 5.2
Korea
POSCO 19,952 4.8 5.0 5.2 3.1 2.9 2.7 0.4 0.4 0.4 9.8 8.7 7.9
Hyundai Steel 4,206 3.6 4.0 4.1 3.9 3.7 3.5 0.3 0.3 0.2 7.7 6.6 6.2
US
Nucor 31,912 4.5 9.6 11.1 3.1 6.0 6.6 1.6 1.3 1.1 45.4 17.1 11.8
US Steel 6,201 2.2 5.5 5.9 1.2 2.1 2.0 0.5 0.5 0.4 30.8 9.3 7.8
Steel Dynamics 14,323 3.9 7.3 10.5 2.4 3.6 4.5 1.5 1.2 1.0 50.7 20.9 12.2
Europe
AM 25,372 2.3 4.3 4.6 1.6 2.5 2.7 0.5 0.4 0.3 20.2 9.9 7.9
SSAB 5,562 3.1 6.9 10.4 1.5 3.0 3.9 0.7 0.7 0.6 22.6 9.4 6.0
TKA 5,417 4.0 6.5 6.7 0.6 0.6 0.6 0.4 0.4 0.4 9.3 5.4 5.7
VOE 5,006 4.4 5.8 7.5 3.3 3.2 3.6 0.7 0.7 0.6 16.6 11.8 8.9
China
Baosteel 21,194 6.3 5.8 5.8 3.5 3.1 2.9 0.7 0.6 0.6 11.1 11.0 10.8
Source: MOFSL, Bloomberg (*) denotes MOFSL estimates

Exhibit 10: Global Iron ore – comparative valuations

M-cap P/E (x) EV/EBITDA (x) P/B (x) RoE (%)
CY21/ CY22/ CY23/ CY21/ CY22/ CY23/ CY21/ CY22/ CY23/ CY21/ CY22/ CY23/
Company USD m
FY22 FY23 FY24 FY22 FY23 FY24 FY22 FY23 FY24 FY22 FY23 FY24
NMDC* 5,512 4.3 10.9 6.0 3.1 8.1 4.5 1.3 1.2 1.1 31.4 11.4 19.6
Vale 83,465 3.8 4.4 5.2 2.6 3.1 3.2 1.7 1.6 1.6 50.5 36.4 29.2
FMG 43,540 6.9 7.8 12.0 4.2 4.9 6.2 2.5 2.4 2.4 36.7 34.7 20.7
Source: MOFSL, Bloomberg (*) denotes MOFSL estimates

23 May 2022 5
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Metals valuation charts

Exhibit 11: Tata Steel EV/EBITDA Exhibit 12: Tata Steel P/B
EV/EBITDA (x) Avg (x) Max (x) P/B (x) Avg (x) Max (x)
Min (x) +1SD -1SD Min (x) +1SD -1SD
16.0 14.2 4.0
3.0
12.0 9.3 3.0

2.0 1.8
8.0 6.5 1.2
4.3 1.2
3.8 1.0
4.0 0.7
0.5
2.1 0.0
0.0

Nov-14

Nov-19

May-22
May-12

May-17
Aug-13

Aug-18
Feb-16

Feb-21
Nov-14

Nov-19

May-22
May-12

May-17
Aug-13

Aug-18
Feb-16

Feb-21

Exhibit 13: JSW Steel EV/EBITDA Exhibit 14: JSW Steel P/B
EV/EBITDA (x) Avg (x) Max (x) P/B (x) Avg (x) Max (x)
Min (x) +1SD -1SD Min (x) +1SD -1SD
14.0 3.2
12.3 2.7
11.5 2.5 2.0 2.0
9.2
9.0 1.7 1.5
7.4 6.3 1.0
6.5 5.5 1.0
0.6
4.0 4.3 0.2
Nov-14

Nov-19
May-12

May-17

May-22
Aug-13

Aug-18
Feb-16

Feb-21
Nov-14

Nov-19

May-22
May-12

May-17
Aug-13

Aug-18
Feb-16

Feb-21

Exhibit 15: JSPL EV/EBITDA Exhibit 16: JSPL P/B

EV/EBITDA (x) Avg (x) Max (x) P/B (x) Avg (x) Max (x)
Min (x) +1SD -1SD Min (x) +1SD -1SD
2.4
24.0 2.0
17.8 1.8
18.0
12.6 1.2 1.1
12.0 1.2
8.3 0.7
6.0 0.6 0.3 0.2
3.3
3.9
0.0 2.0 0.0
Nov-14

Nov-19
May-12

May-17

May-22
Aug-13

Aug-18
Feb-16

Feb-21
Nov-14

Nov-19

May-22
May-12

May-17
Aug-13

Aug-18
Feb-16

Feb-21

23 May 2022 6
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Exhibit 17: SAIL EV/EBITDA Exhibit 18: SAIL P/B

EV/EBITDA (x) Avg (x) Max (x) P/B (x) Avg (x) Max (x)
Min (x) +1SD -1SD Min (x) +1SD -1SD
80.0 1.2 1.1
60.2 0.9 0.8
60.0
0.6
40.0 0.6 0.4 0.7
17.7 0.3
20.0
10.0 0.2
2.2 2.5 0.0
0.0 3.9

Nov-14

Nov-19

May-22
May-12

May-17
Aug-13

Aug-18
Feb-16

Feb-21
Nov-14

Nov-19

May-22
May-12

May-17
Aug-13

Aug-18
Feb-16

Exhibit 19: NMDC EV/EBITDA Feb-21 Exhibit 20: NMDC P/B

EV/EBITDA (x) Avg (x) Max (x) P/B (x) Avg (x) Max (x)
Min (x) +1SD -1SD Min (x) +1SD -1SD
20.0 18.7 3.5

15.0 2.7
2.5
10.9 1.9
10.0
7.1 1.5 1.5 1.2
5.0 1.0
5.0 3.4 0.8
2.5 0.5
0.0
Nov-14

Nov-19
May-12

May-17

May-22
Aug-13

Aug-18
Feb-16

Feb-21
Nov-14

Nov-19
May-12

May-17

May-22
Aug-13

Aug-18
Feb-16

Feb-21

23 May 2022 7
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NOTES

23 May 2022 8