With exports unlikely to rebound to peak levels and prices expected to remain weak, analysts are recommending select stocks such as Tata Steel, JSPL, NMDC, Kirloskar Ferrous, and Tata Metaliks, among others.
"India's total exports declined by 16.7% in October, and the dip in steel exports was huge, and a course correction in this trend has become necessary to achieve the 7% GDP growth rate projected by the government."
Mumbai: The much-anticipated removal of export duty on steel and iron ore has come as a relief to investors but analysts do not expect a sustained recovery in shares of companies in the sector.
"Removal of 15% duty should, however, enable mills to export any excess inventory held by them, limiting the pressure on domestic steel prices," said Axis Capital in a note. "We remain conservative on steel demand and price outlook and do not see much upside potential in the sector." The brokerage said Tata Steel and JSPL are better placed due to reasonable valuation and lower leverage.
Most large-cap steel stocks ended weak on Monday after the announcement. JSW Steel declined 1.7%, Tata Steel dropped 1.2% and JSPL fell 0.3%. Mid-cap metal stocks such as Godawari Power and Ispat, Jindal Stainless, Jindal Stainless Hissar, SAL Steel, Visa Steel, and Pennar Steel, among others, gained between 5% and 15% on Monday.
The government has withdrawn the 15% export duty on steel products which was levied in May this year. The government has also withdrawn the export duty on select iron ore lumps. Export of iron ore lumps and fines above 58% iron content will now attract a lower duty of 30% compared to 50% earlier.
"Removal of export duty on steel is a timely decision to boost the fortunes of the steel industry, which is facing a serious issue of declining demand and price correction," said V K Vijayakumar, strategist at Geojit Financial Services.
"India's total exports declined by 16.7% in October, and the dip in steel exports was huge, and a course correction in this trend has become necessary to achieve the 7% GDP growth rate projected by the government."
Post the imposition of export duty in May 2022, Indian steel exports dropped a steep 53% in the first half of FY23 to 5 million tonnes compared to 11 million tonnes in the same period the previous year. Exports of iron ore and pellets in April-September FY23 at 6.98 million tonnes, declining sharply by 63% from 18.9 million tonnes in the first half of FY22.
Nomura said the decline in steel export price for India has largely been in line with that of its peers, largely led by the slowdown in global and China demand.
“We do not expect a significant uptick in export prices following the discontinuation of export duty on steel,” said Nomura in a note to clients. “With the removal of export duty, we expect export volumes to recover thereby preventing oversupply and providing some downside protection to steel prices. Hence, in our view, had the export duties not been removed, India’s domestic steel prices could have converged to the import parity prices.”
Steel stocks fell sharply after the government imposed export duty on May 21. Stocks such as Tata Steel, Jindal Steel and NMDC plunged 26-35% in a month compared to the 5% fall in the Sensex.
“The rollback provides some flexibility to steel producers to command a premium in the domestic market, and thereby domestic prices should not fall in a hurry,” said Ashish Kejriwal, an analyst at Nuvama Research. “It should also have an impact on valuation multiple, and as a result, we increase the valuation multiple of JSL, JSPL, JSW, and Tata by 4-10%.”
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