Wednesday’s top brokerage calls: Godrej Consumer and steel stocks

Stocks to buy
CLSA on Godrej Consumer: The brokerage maintains an ‘outperform’ call on the stock with a target at Rs 800 per share. It added that the company reported weak margin delivery in the inflationary setting.
Jefferies on Godrej Consumer: The brokerage maintains a ‘buy’ call on the stock and raised the target to Rs 1,000 per share from Rs 840 earlier.
Credit Suisse on Godrej Consumer: The brokerage has an ‘outperform’ call on the stock with a target at Rs 875 per share. CEO appointment of Sudhir Sitapati a major medium-term positive, it added.
Credit Suisse on Steel: As per the brokerage, unprecedented discount to export prices opens room for hikes. Domestic prices are at a 22 percent discount to China. It prefers Tata Steel and JSOL in the steel space.

Here’s why Nifty Metal has gained 68% YTD; 106% in last 6 months

Metals gauge, Nifty Metal index has posted over 68 percent returns year-to-date (YTD) and more than 106 percent gains in the last six months. The rally has been fuelled as commodity prices see an uptrend on signs of recovery in the world economy which seems to be moving out of the woods.

Among metals, the prices of steel and copper have surged to levels not seen for many years. This sharp rally has sweetened the prospects of the domestic steel and metal companies.

In fact, in April 2021, domestic steel players announced further price hikes by up to Rs 1,000-2,000 per tonne in HRC and around Rs 3,000 per tonne in CRC. HRC are offered at Rs 59,700-60,000 per tonne in April 2021, up from Rs 36,950 per tonne in April 2020. This is the highest level seen since 2008, the year of the financial crisis.

The up-cycle in domestic steel prices is supported by the bullish trend in the global steel prices and a revival in domestic demand.

The rise in global steel prices is linked to China, a crucial supplier and consumer of commodities. Beijing’s recent move to limit capacity fuelled worries about a supply shortage and prompted speculative buying.

Beijing announced a series of measures on Friday to tighten controls on steel capacity, in an effort to curb pollution in key areas as well as reduce blind investments and disorderly constructions.

Additionally, fiscal measures announced by the US also propelled optimism in the market. The expectations of rise in industrial demand for global commodities in the US lifted the steel prices.

Yet another factor is the reopening of the European economy as acceleration in the COVID-19 vaccination rollout also supports steel prices.

Taking a positive stance on the situation, CARE Ratings expects FY22 steel production to reach 112-114 million tonnes, posting a growth of 8-9 percent YoY. The crude steel production is expected to be marginally higher than in FY19 when India produced nearly 111 million tonnes of crude steel.

Steel demand will be supported by economic recovery, government spending and enhanced liquidity, CARE Ratings added.

Experts believe that the up-cycle in steel prices is expected to continue in FY22.

“Stimulus package unveiled by various countries will keep the demand for steel high. The absence of China from the world export market and higher import of steel from China is one of the major factors keeping steel prices elevated,” CARE Ratings said.

Continued higher demand from China on the back of the stimulus package and the country’s desire to bring down production levels in 2021 to reduce Co2 levels will be an important factor that will strengthen steel prices.

Demand-supply imbalance in the global market will also continue to present export opportunities to domestic players

BOTTOMLINE: Brace for hit to earnings; adjust your portfolio

Tata Steel posted a heady 70 percent increase in its operating profit in the just concluded financial year. This doesn’t happen often. Higher volumes and an increase in prices from near Rs 47,000 per tonne to Rs 63,000 per tonne have led to this big outperformance. Is this normal? No.

The outcome is a result of cyclical and extraneous factors, like China’s regulatory moves on pollution and export sops. Stepping away from steel, global commodities tend to have their cyclical moves—up and down. The last commodity supercycle ended in 2011, with the S&P World Commodity Index (a composite of agri, energy and metals) at well over 400. Following this, we saw a significant drop to about 130 levels in January 2016, and then a climb to a near 300 peak in October 2018. April last year saw the index test the 130 levels again, and we are up near 280 now. How much more is there to run? That’s a trillion-dollar question. But even if we expect to peak near 300 again, there’s maybe another 7 percent upside in the offing.

We’ve already had several company managements, and even the Sage of Omaha, Warren Buffett, speaking of the input price inflation. And this is clearly a worry for several businesses, at a time when demand is in limbo due to the COVID surge and a recovery is likely to be weaker than after the first wave. Will businesses have to absorb some cost and take a profitability hit or will they pass it on and risk inflation crimping demand. We’ll know soon enough. But what can this do to your portfolio? Here there’s hope. Before we get there, though, let’s just focus on the nature of the demand-supply disruption and the price surge.

THE PRICE SURGE

From oil to copper to steel to wheat to soya bean to sugar, commodity prices across the spectrum are climbing higher. Crude, copper, and steel are all up over 30 percent since the start of 2021. Wheat and soya bean are up 19 percent and 21 percent, respectively. There’’ also a surge in shipping freight rates, and the digitalization trend has spurred employee cost inflation for the technology majors, as the flight for talent gets fiercer. Costs are heading higher.

Commodity
YoY
YTD
WTI
243.5%
33.4%
Copper
95.1%
31.8%
Aluminium
71.4%
26.4%
HRC Steel
80.5%
31.9%
Lead
35.6%
11.2%
Note: YoY is over April-end 2020

 

Commodity
YoY
YTD
Wheat
45.6%
18.8%
Soyabean
85.4%
21.0%
Sugar
69.3%
13.6%
Coffee
32.3%
12.2%
Note: YoY is over April-end 2020
 

Oil for India is the big one, and with fuel retailers starting to raise prices last week after the state elections ended, inflation in transportation costs is expected to work its way into cost escalation for most products.

Interestingly, though, while India’s high consuming class will likely need to cope with an increase in prices of several goods that use these commodities—like automobiles, consumer durables, fast-moving consumer goods, and foods—a quick study of Consumer Price Index (CPI) and global commodity prices didn’t reveal a strong positive correlation, as these trends are likely offset by other local factors and other weighted items like housing and education.

So, inflation in many segments is coming, whether it reflects in the overall CPI or not. And that could well hurt profitability or growth for companies operating in these segments, even as it will fuel profits for the commodity suppliers.

PORTFOLIO IMPACT CAN BE LIMITED

For every rupee more a Maruti or Tata Motors spends on steel, a Tata Steel or a JSW Steel likely earns a rupee more. A similar value chain exists in most other segments. So, one man’s loss is another man’s gain. Of course, where India is deficient, pricier imports will not yield higher domestic profits. And oil is the big commodity to track here. If oil prices continue to surge, all of India will hurt.

A study of the Sensex earnings and global commodity prices suggests a moderate negative correlation of 0.52. So, while rising commodity prices can impact earnings, the extent may be limited. This is likely because the diversified set of stocks in the index—some commodity plays and others user segments—will ensure some balancing of the impact.

A quick look at the quarterly performance of 104 companies in the BSE-500 index that have reported results for the fourth quarter reveals that only 50 of them have an input cost to net sales ratio of over 10 percent. Of the 50, 33 saw an increase in input costs to net sales on a quarter-on-quarter basis, with the increase ranging from 0.6-9.5 percent. On a year-on-year basis, though, the escalation was far lower. Against the average quarter-on-quarter increase of 3.2 percent for the 33 companies, their year-on-year increase was only 0.2 percent.

What this suggests, given the sharp spike in commodity prices in the past two months and with older inventories getting cleared, is that a more visible impact is likely ahead of us. And this can lead to moderation in profitability expectations. Couple this with the now anticipated slower growth in revenues due to the COVID disruption, and we might be setting ourselves up for some downward revisions ahead in several sectors, though external economy-linked sectors could fare well given the expected strong US and global recovery.

That’s at a broad, industry level. From a portfolio perspective, given the difficulty in forecasting commodity cycles and timing the tops and bottoms, it makes sense to diversify holdings across commodity and user segments, so that when the cycle turns you are hedged. And here, a diversified index like the Sensex or the Nifty is a good bet. In any case, the track record of most active fund managers’ pales when compared to the index returns. So, don’t try to jump into a likely overheated steel or aluminum stock, or out of it. Opt for a disciplined approach, you won’t make outsized profits, but neither outsized losses.

Steel prices go up by Rs 3,500-4,500 per tonne in May, says JP Morgan

Steel stocks are higher in trade. The street was bracing for a price hike at the start of May and that is what precisely has happened.

Most brokerages and JP Morgan have said that in May itself there was a price increase of nearly Rs 3,500-4,500 per tonne.

In April, prices went up by close to Rs 7,000 per tonne. In a matter of nearly 40 days odd, prices went up by more than Rs 10,000 per tonne.

CNBC-TV18’s Nigel D’Souza gets more details.

Watch this video for more.

Indian steel demand expected to be strong; likely to jump by 19.8% YoY

Steel prices are nearly 12 percent up in April. Trading at nearly all-time highs, prices are up 26 percent for the year.

The World Steel Association suggested that the estimated global steel demand for 2021 could be up by 6.1 percent at around 1,875 million tonnes. China will comprise 3 percent of it at around 1,025 tonnes.

Indian demand is expected to be quite strong. The demand could be up by 19.8 percent as compared to last year at around 106 million tonnes.

For more details, watch the video.

Steel sector supplies 3000 tonnes of oxygen per day to hospitals

All sectors are currently diverting close to 1,000 tonnes of liquid medical oxygen daily to hospitals across the country. For the steel sector, it is close to 3,000 tonnes per day that is diverted daily to hospitals.

So far, since September, steelmakers alone have supplied 1.43 lakh tonnes of medical oxygen to various hospitals.

SAIL has supplied the highest, 39,000 tonnes of liquid medical oxygen. JSW Steel has supplied 900 tonnes of oxygen and it estimates to increase the supply by 20,000 tonnes by the end of this month.

JSPL is another company that is catering to the nearby location from its plant which is Angul in Odisha and Raigarh in Chhattisgarh which is supplying to Delhi.

Watch the accompanying video of CNBC-TV18’s Anushu Sharma for more details.

Steel prices expected to marginally move up from current levels

The steel stocks have been rallying for the past few months. Many thought that the rally was done and the steel prices would not rise as they had risen over the past few months, but prices have moved up even more.

Vikash Singh, VP-Metals and Mining at Philip Capital said, “If we look at the Indian steel prices, they are still at a fair discount to the imported prices. So, the prices should either stay consistent at this level or there is a slight possibility of prices going up marginally from current levels. So for the time being we are advising people to hold on to the ferrous names like SAIL, Tata Steel.”

Amit Dixit, Research Analyst at Edelweiss Institutional Equities said that prices and stocks are moving up essentially because of the implementation of production cuts at Tangshan which would reduce steel production by around 22 million tonne for the year.

“22 million tonne might not seem huge in the overall context of the steel industry, but in terms of sea-bound market, there is no country that can replace that 22 million tonne. Also, if you look at the US and Europe, prices are not only at a 13-year high but also have breached the level that was seen before GFC. There the supply crunches are acute and our channel check indicates that in Europe the tight situation can continue well into Q4 of CY21. So we are seeing a long run and we can only take it to step by step because these policies can be typically very unpredictable. If tomorrow, the Chinese government decides to loosen the carbon emission thing a bit, then you will immediately find prices and stocks retracing back,” he said.

However, Dixit said that according to data for May and June, it is going to be the best quarter for steel companies.

“From the booking data we have for May and June, we believe that Q1FY22 would be possibly the best quarter that we would have seen in last so many years. It will be a record quarter for almost all the companies in the space,” he said.

Watch the video for a detailed analysis

Thursday’s top brokerage calls: RBI policy, steel stocks and more

Stocks to buy
Morgan Stanley on RBI Policy: Managing liquidity and commitment to buy G-Sec indicates a more dovish stance, said the brokerage. It feels that as growth conditions normalise, RBI should take steps to normalise the policy.
Nomura on RBI Policy: The brokerage feels RBI’s policy decision is less dovish than what meets the eye. It added that managing the yield curve may be challenging if long-term inflation expectations rise.
Credit Suisse on Steel: Indian steel pricing rose $50/t this week in the trader’s market, said the brokerage, adding that the prices are likely to be elevated on-demand recovery, shortage and cost-push. It likes Tata Steel and JSPL in the space.
Citi on Steel: The brokerage raises FY22 EBITDA estimate by 12-20 percent for JSW Steel, JSPL & SAIL.
Macquarie on IT Sector: The brokerage sees strong demand tailwinds for Indian IT aided by cloud and digital transformation. Top large-cap picks in the IT space for Macquarie are Infosys and HCL Tech.
CLSA on IT Sector: As per the brokerage, the strength of deal activity is in line with recent commentaries by Indian IT companies.
CLSA on Bharti Airtel: The brokerage maintains a ‘buy’ call on the stock with a target at Rs 730 per share.

Steel prices at record highs; expect softness in H2FY21: Wood Mackenzie’s Sandeep Kalia

Steel prices have continued to run-up trading at all-time highs in Chinese markets and the Indian prices do take sense in what is happening globally. Prices have gained up by 10 percent in this calendar year and the market suggests that there is further room on the higher side for the steel prices.

Sandeep Kalia, principal analyst at Wood Mackenzie, spoke to CNBC-TV18 on global steel production and prices moving to historic highs.

Talking about steel as a sector, Sandeep Kalia said, “Steel as a sector has started coming back to normalcy levels since the second half of last year. In fact, during the year 2020 the World ex-China crude steel production was down by 8 percent. We feel the momentum has continued in China and India as well and probably China will touch its peak steel production in the current year 2021.”

On steel prices, he further added, “Steel prices at this point of time are at historic highs I would say, but we do expect some sought of softness going forward in the steel prices. The reason for that is the supply position for iron ore which is the main commodity for steel making and China importing close to a billion tonne of iron ore per annum the supply situation on the iron ore front is going to increase in the rest of the year 2021.”

“As far as the steel prices are concerned, Indian steel prices are governed by the global steel prices and we do expect some sort of softness in the global steel prices especially from the second half of this year given the ease out in the iron ore supply position leading to a decline in the raw material costs thereby declining the steel prices”

On Indian steel production, he said, “Our current forecast as far as the Indian steel production is concerned it is about 12 percent increase over 2020.”

For full interview, watch accompanying video…

Strong demand driving steel price hikes: Experts

The steel prices are rising and are expected to go up further this week due to increasing demand and high costs. The steel companies are also renegotiating the contracts with auto companies.

“There has been a price increase. In the last couple of days, we have already increased the prices by about Rs 3,000 per tonne. The demand on the ground is pretty good, which is primarily driving the prices also,” Mayank Agrawal, CEO of Gallantt Ispat told CNBC-TV18.

Speaking on the same lines, Sachit Jain, VC and MD of Vardhman Special Steels said that the steel demand was very strong.

“Demand is very strong, most of us are running our plants at full capacity. So strong demand, as well as cost push, are the two factors which are leading us to ask for the price increase,” he said.

“Going by past trends, normally it takes around a little more than a month for the auto companies to finish the negotiations. We are available for discussions. We have asked for Rs 6,200 per tonne of price increase from April 1,” Jain added.

According to Jain, other steel companies have asked for a higher price increase of upto Rs 8,600-9,000 per tonne.

For the entire discussion, watch the video…