India Steel Sector

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

17 March 2017 Asia Pacific/India Equity Research

Steel

India Steel Sector Research Analysts

Ravi Shankar

91 22 6777 3869

[email protected]

Neelkanth Mishra

91 22 6777 3716

[email protected]

Prateek Singh

91 22 6777 3894

[email protected]

COMMENT

The long and flat of it

Figure 1: Improving dynamics for flats: falling imports, rising exports

Source: Steelmint, Ministry of Steel, Credit Suisse estimates

■ Two equal halves: one local, other global; we prefer the latter. We look at

the two halves of the steel industry—longs and flats (52%-48% production

split) in this report. While the former is not very well traded and hence,

dependent on domestic demand, the latter is seeing a double benefit from

import substitution and rising exports. With China cutting capacity and its mills

focusing on local demand (net exports have halved since Sep-15), we see

bright prospects for flat manufacturers (mainly JSW Steel and Tata) in the

form of rising utilisation levels (near 100%) and continued pricing support.

■ Bulk of new capacity addition is flats - but it is not a concern. We

estimate ~20 mt of incremental capacity getting added during FY17-19 with

flats accounting for ~67%. With exports as an exit route (at realisations that

are not meaningfully lower than domestic’s), oversupply in flats is not a

concern. Within longs, structural have seen healthy domestic demand

(10%, 2011-16), but growth has been weaker for bars/rods (+4%) and rails

(1%). While one could build a scenario of the new 6 mt longs capacity

reaching ~75% utilisation levels over two years, if end-demand grows at

4%, it would still not compare very well with near full-utilisation for flats.

Hence, we regard JSW's product mix as the best (80% flats, negligible

semis) followed by Tata (66% flats).

■ Valuations are not stretched yet. We note the following: (1) given the strong

jump in EBITDA, steel plays are now relatively cheaper on EV-EBITDA vs one

year ago (despite the 40-108% rise in stock prices), but absolute levels still

remain at 7x-8x. (2) On EV per ton of capacity, Tata/JSW/JSPL are all trading

marginally below the replacement cost of US$800-1,000/t, indicating that

valuations are not stretched as yet. (3) Unlike non-ferrous (a consensus buy),

Tata/JSW still have <50% buy ratings. (4) Just a US$10/t higher ASP adds

11-19% upside to our OUTPERFORM stocks: Tata/JSW/JSPL. We raise Tata

Steel’s TP to Rs600 from Rs560 (FY18/19E EPS up 8%) on likely higher

output and better EU spreads. We see clear catalysts too, for Tata in Europe.

0

200

400

600

800

1,000

1,200

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

ktTotal imports

0

200

400

600

800

1,000

1,200


ktTotal exports

17 March 2017

India Steel Sector 2

Focus Charts

Figure 2: Consolidation: Major 4 outpacing the rest Figure 3: Tata/JSW rapidly nearing full ramp-up

Source: Company data, JPC, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Longs insulated from imports Figure 5: Downstream utilisation at 70-75%

Source: JPC, Ministry of Steel, Credit Suisse estimates Source: JPC, Ministry of Steel, Credit Suisse estimates

Figure 6: Best product mix: JSW, followed by Tata Figure 7: ~20 mt capacity adds; 67% flat focused

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 8: Domestic prices US$30-55/t lower vs imports Figure 9: EV/t remains within rational limits

Source: Steelmint, Credit Suisse estimates Source: Company data, CS RAVE, Credit Suisse estimates

-10%

-5%

0%

5%

10%

15%

20%

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Major 4 Rest

% growth in steel output (YoY)

Major 4: JSW + SAIL + TATA + JSPL

60%

70%

80%

90%

100%

Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

JSW Steel Tata Steel

Capacity utilization (%)

Bars/ rodsStructuralsRail

Plates

HR Coils/ sheets

CR Coils/ sheets

GP/GCPipes

0%

5%

10%

15%

20%

25%

-2% 0% 2% 4% 6% 8% 10% 12%

Domestic consumption growth (2012-16)Impo

rts

as %

of c

onsu

mpt

ion

(cum

u.,

2012

-16)

40%

50%

60%

70%

80%

90%

100%

2015 2016

Upstream Downstream

17% 17% 15%

59% 49%32%

33%

0%

20%

40%

60%

80%

100%

JSW Tata Steel SAIL (final) JSPL (final)

Value Added Flats HRC/Plates/Sheets Value Added Longs Semis

1 2 3 4

122

9

6

5

142

110

120

130

140

150

FY16-end FY17 adds FY18 adds FY19 adds FY19-end

Tata's KPO, SAIL (RSP, ISP) and JSPL

SAIL and JSPL (Angul)

NMDC's 3mtpa Nagarnar plant, SAIL (BSL)mt

24,000

28,000

32,000

36,000

40,000

44,000

48,000

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17From CN From RU Mumbai

For hot-rolled coils

753 764 751

470

0

200

400

600

800

1,000

Tata Steel JSW Steel JSPL SAIL

EV/t

Replacement cost for the industry: $800-1,000/t

US$/t

Discount to peers, barely any EBITDA at curr. prices

17 March 2017


The long and flat of it Most of the analysis on steel is based around treating it as a homogenous product. The

total output (whether global or for a particular country) is conveniently summed and netted

out against net exports to arrive at a product-agnostic apparent consumption. In this

report, we take a closer look at the Indian steel market, separately analysing upstream and

downstream segments to draw end-consumption and pricing related insights

Two equal halves: one local, other global

At 130 mt, India accounts for 5.5% of global capacity which runs at a higher utilisation (76%)

than the global average (69%). While the top 10 players account for 63% of the capacity, the

tail is quite long—there are 308 sponge iron units feeding into 1,100+ induction furnaces. We

are indeed seeing industry consolidation with 10-15% smaller units having closed in FY16.

Paucity of coal could be a reason then, but a broader market share shift towards big players

continues to play out: steel output growth at the Major 4 (Tata, JSW, SAIL and JSPL) has

outpaced the rest of the industry in each of the last eight quarters.

India's finished steel output is split almost equally between longs (52%) and flats (48%).

While the former is not very well traded and hence, dependent on domestic demand, the

latter is seeing a double benefit from import substitution and rising exports. With China

cutting capacity and its mills focusing on local demand (net exports have halved since

Sep-15), we see bright prospects for flat manufacturers (mainly JSW Steel, Tata) in the

form of rising utilisation levels (near 100%) and continued pricing support (lower Chinese

exports imply greater demand for ore in RoW, resulting in higher iron ore prices).

Capacity addition flat heavy; exports remain key

We estimate ~20 mt of incremental capacity getting added during FY17-19 with flats

accounting for ~67%. With exports as an exit route (at realisations that are not

meaningfully lower than domestic’s), oversupply in flats is not a concern. In fact, courtesy

adequate domestic protection, there is scope for a US$30-70/t rise in domestic flat prices,

if local demand gets more supportive.

Within longs, structural have seen a healthy domestic demand (10%, 2011-16), but growth

has been weaker for bars/ rods (+4%) and rails (1%). While one could build a scenario of

the new 6 mt longs capacity reaching ~75% utilisation levels over two years, if end-

demand grows at 4%, it would still not compare very well with near full-utilisation for flats.

Our analysis suggests that JSW's product mix is the best (80% flats, negligible semis)

followed by Tata (66% flats). While both SAIL/ JSPL have a similar share of rails (8-11%)

and semis (9-12%) in the mix, SAIL has a slight advantage (higher value-added flats).

Valuations are not stretched yet

We believe the EV-EBITDA measure continues to be misleading: given the strong jump in

EBITDA, steel plays are now relatively cheaper on EV-EBITDA vs one year ago (despite

the 40-108% rise in stock prices), but absolute levels still remain at 7x-8x. Over the same

period, we have seen a near consistent 20% rise in EV for Tata, JSW and SAIL. On EV/t

(capacity basis), Tata/JSW/JSPL are all trading marginally below the replacement cost of

US$800-1,000/t, indicating that valuations are not stretched as yet.

Unlike non-ferrous (a consensus buy), Tata/ JSW still have <50% buy ratings. Given the strong

rally so far, the market may differentiate going forward: SAIL has a run-up in line with Tata/

JSW but with near-zero EBITDA, it still struggles to cover interest costs. JSPL's rise in EV has

lagged peers but it could be approaching a turnaround with output ramp-up at Angul. Just a

US$10/t higher ASP adds 11-19% upside to our OUTPERFORM stocks: Tata/JSW/JSPL. We

raise Tata Steel’s TP to Rs600 (FY18/19E EPS up 8%) on likely higher output and better EU

spreads. We see clear catalysts for Tata: UK pension resolution/ JV in Europe.

Steel is not homogenous—we

analyse it in terms of longs and flats in this

report

Steel output growth at the Major 4 (Tata, JSW,

SAIL and JSPL) has outpaced rest of the

industry in each of the last eight quarters

Finished steel output is split almost equally

between longs (52%) and flats (48%)

Almost two-thirds of new capacity addition

is flat-focused; not a concern, in our view

Longs: structural seeing healthy demand,

but growth weak for bars/rods and rails

JSW best positioned to benefit, given its

product mix; Tata next best

Tata/JSW/JSPL still trading marginally

below the replacement cost of US$800-1,000/t

Unlike non-ferrous (a consensus buy), Tata/

JSW still have <50% buy ratings

17 March 2017


Valuation summary

Figure 10: Valuation summary for steel companies under CS coverage

Name Ticker Rating Mcap EV PE EV:EBITDA P/B DivYld

USD Mn USD Mn 2015 2016 2017 2015 2016 2017 2016 2016

Asia

Angang Steel Company 0347.HK O 6,291 10,183 -8.7 23.9 10.3 58.8 10.0 6.3 0.9 0.0%

Baosteel 600019.SS O 22,157 27,912 112.4 14.3 11.5 12.8 8.2 6.8 1.0 3.9%

Hitachi Metals 5486 N 6,109 6,998 9.8 10.0 15.2 6.9 5.5 7.0 1.4 1.6%

Hyundai Steel Co. 004020.KS O 7,539 17,851 11.4 10.2 8.6 7.5 7.0 6.3 0.5 1.1%

JFE 5411 O 10,389 22,070 8.4 35.0 168.2 6.5 9.3 12.3 0.7 1.5%

Jindal Steel & Power Ltd JNSP.BO O 1,791 8,770 -9.2 -5.5 -5.0 10.0 18.7 13.9 0.6 0.0%

JSW Steel Ltd JSTL.BO O 7,108 12,913 25.9 -62.6 13.8 9.7 15.7 7.7 2.2 0.4%

Kobe Steel 5406 N 3,501 8,862 4.6 -18.5 -397.9 4.7 6.1 8.2 0.6 0.2%

Maanshan Iron & Steel Co 0323.HK O 3,735 6,411 -4.5 17.7 9.8 -82.3 7.9 5.9 1.0 0.0%

Nippon Steel & Sumitomo 5401 N 20,883 37,845 11.8 16.6 20.1 6.2 8.8 9.9 0.9 1.7%

POSCO 005490.KS O 22,469 39,789 129.1 17.1 11.8 8.1 7.3 6.6 0.6 2.6%

Steel Authority of India Ltd SAIL.BO U 4,017 9,102 12.6 -6.3 -9.7 13.3 -16.5 288.0 0.7 0.0%

Tata Steel Ltd TISC.BO O 7,413 19,001 -12.5 -16.1 -25.4 10.7 19.6 9.6 1.7 1.6%

Australia

BlueScope Steel BSL.AX O 5,845 6,425 57.1 26.8 11.4 12.2 8.8 5.2 1.7 0.4%

Sims Metal Management SGM.AX U 1,929 1,749 25.6 67.8 21.7 8.4 12.3 8.1 1.4 1.7%

Europe

Acerinox ACX.MC O 3,997 4,733 83.1 45.6 12.7 15.8 13.4 7.6 1.8 3.2%

Aperam APAM.AS O 4,037 3,998 23.5 18.9 11.2 8.3 7.9 6.2 1.6 2.9%

ArcelorMittal MT.N O 28,169 45,081 -2.7 14.8 7.3 9.5 7.2 4.9 0.9 0.0%

Evraz EVRE.L O 3,539 8,511 -5.5 10.2 6.0 5.9 5.6 4.6 4.1 0.0%

Kloeckner & Co. KCOGn.DE N 1,174 2,014 -3.2 29.7 14.5 21.0 9.7 7.9 1.0 1.8%

Magnitogorsk Steel MAGNq.L O 6,646 7,765 15.8 5.7 6.9 4.7 4.1 3.4 1.5 4.2%

Novolipetsk Steel NLMKq.L O 11,147 12,238 11.5 11.3 9.2 6.3 5.9 5.3 1.7 7.6%

Outokumpu OUT1V.HE O 4,490 6,042 47.0 29.5 8.2 30.9 19.0 6.2 1.7 1.0%

Salzgitter SZGG.DE U 2,264 3,960 -39.5 60.3 23.8 7.6 8.8 7.9 0.7 0.7%

Severstal CHMFq.L N 11,105 11,420 18.4 6.4 9.2 5.6 6.1 5.8 3.7 5.1%

SSAB SSABa.ST O 3,799 5,665 -71.1 35.1 16.0 15.3 10.1 6.5 0.6 0.0%

Tenaris TENR.MI U 19,012 16,900 -237.2 343.8 88.2 13.5 28.3 18.8 1.7 2.5%

Thyssen Krupp AG TKAG.DE O 14,157 28,063 41.2 38.6 26.5 8.3 9.7 8.0 6.3 0.7%

Vallourec VLLP.PA U 2,596 4,210 -0.8 -3.1 -4.5 -53.8 -18.1 -49.9 0.5 0.0%

Voestalpine VOES.VI N 7,297 12,719 13.3 13.3 14.1 7.9 7.7 7.8 1.4 2.7%

Americas

Companhia Siderurgica CSNA3.SA U 4,913 11,394 9.8 -18.9 24.8 12.6 9.0 6.4 1.9 0.2%

Gerdau GGBR4.SA O 6,872 11,565 -18.3 -428.1 63.8 8.8 8.8 6.8 0.8 0.4%

Industrias CH S.A.B. d ICHB.MX N 2,643 2,228 20.7 13.6 14.3 9.5 8.8 5.3 1.6 0.0%

Nucor Corporation NUE N 20,231 21,942 71.2 26.8 20.1 16.7 10.2 8.7 2.6 2.4%

Ternium TX N 5,363 6,732 661.6 8.2 13.4 6.3 3.9 4.5 1.2 3.4%

United States Steel Corp. X N 6,564 8,080 -21.1 -23.8 27.3 -17.7 23.6 7.7 2.6 0.5%

Source: CS Rave, Credit Suisse estimates

17 March 2017


Two equal halves: one local, other global Most of the analysis on steel is based around treating it as a homogenous product. The

total output (whether global or for a particular country) is conveniently summed and netted

out against net exports to arrive at the apparent consumption. In this report, we take a

closer look at the Indian steel market, looking at it through the finer lens of upstream and

downstream segments and dissecting the finished output further into long and flat products

to draw end-consumption and pricing related insights.

Big picture: BF route dominant; scrap usage rising

Figure 11: Capacity additions to take a breather Figure 12: Rising share in global output

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: Ministry of Steel, JPC, Credit Suisse estimates

India has a total capacity of ~130 mt (~5.5% of global capacity) and is now approaching

the end of the last major capex cycle (Figure 11). India's share in global steel output has

been on a steady rise and is now closer to ~6% (Figure 12).

Figure 13: India steel production map (2016): high dependence on integrated hot metal output

Source: Ministry of Steel, JPC, Credit Suisse estimates

0

2

4

6

8

10

12

14

-

20

40

60

80

100

120

140

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018F

Addition (mt, RHS) Capacity

mt mt

First wave of capacity addition

Second wave of capacity addition

0%

2%

4%

6%

8%

0

30

60

90

120

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018F

Production India's share in global output (%, RHS)

mt % of total

Steel is not homogenous—we

analyse it in terms of longs and flats in this

report

India has total capacity of ~130 mt (~5.5% of

global capacity)

17 March 2017


Given abundant iron ore, India's capacity is primarily driven by the integrated blast furnace

route with hot metal accounting for the bulk of metallic charge to produce steel (Figure 13).

The share of DRI has been on the decline (Figure 13) and the trend has been gradual, as

against the common perception that the recent drop has been more on account of the

deallocation of the captive coal blocks in 2014.

Scrap usage has been growing steadily and the bulk of it is being sourced domestically,

with imported scrap accounting for ~12% of total usage (Figure 15).

Figure 14: Scrap has been replacing DRI in India

over the years …

Figure 15: … with a bulk of it being sourced

domestically


At the steelmaking stage, the basic oxygen furnace route remains the most dominant,

given high hot metal output in the preceding stage (Figure 16). However, at 43%, it

remains low compared to other regions in the world (Figure 17). China leads the pack with

~94% of output through the Basic Oxygen Furnace route that primarily requires hot metal

(and less of DRI/scrap) for steel making.

Figure 16: BoF route dominant for crude steel

production

Figure 17: India has relatively low BoF share when

compared to other geographies

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: IISI, JPC, Credit Suisse estimates

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Hot metal DRI Scrap

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Scrap for crude steel o/w imported scrap % imported

mt

43%

27%

30%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016

Oxygen route EAF IF route

8%

37% 37%

56% 59%66% 68%

74% 77%

94%

0%

20%

40%

60%

80%

100%

BoF EF Others

India's capacity is primarily driven by the

integrated blast furnace route with hot metal

accounting for the bulk of metallic charge

China leads the pack with ~94% of output

through the Basic Oxygen Furnace route

17 March 2017


Capacity concentrated at the top; and then a long tail

Abundant thermal coal availability in India likely spurred numerous secondary mills. As per

JPC data, while there were only 55 blast furnaces in India and 14 basic oxygen furnaces in

2016, there were 308 sponge iron units feeding into 1,100+ induction furnaces (average

40 ktpa capacity, Figure 18). These induction furnaces mostly sell to the ~1,400 re-rolling

mills downstream. Although, if we were to compare this data with 2015, almost 10-15%

units shut down across the spectrum, along with a resultant increase in average capacity

(Figure 19). Thus, the data does support anecdotal evidence of mini-mills closing amidst

worsening economics (falling ASP, expensive coal) in 2015-16.

Figure 18: Sponge iron-IF-Rebar market fragmented Figure 19: Some consolidation of late


Capacity-wise, while the top five players account for almost half of the total installed capacity,

the tail remains fat (Figure 20). The trend of closures/market share shift towards major players

seems on going: production growth at the major players (JSW + SAIL + Tata + JSPL) has

been outpacing the rest of the industry for at least the last eight quarters (Figure 21 ).

Figure 20: Indian steel capacity: concentrated at the

top, but has a long tail

Figure 21: Output growth at major players

outpacing the rest, now for at least 8Qs

Source: Company data, JPC, Credit Suisse estimates Source: Company data, JPC, Credit Suisse estimates

0

200

400

600

800

1,000

1,200

1,400

1,600

# of units

-20%

-10%

0%

10%

20%

30%

40%

Sponge Iron IF Re-rolling HR Flat

% change in units (YoY) % change in avg. capacity (YoY)

Change from 2015 to 2016

37%

50%

63%

71%

0%

20%

40%

60%

80%

100%

Top 3 Top 5 Top 10 Top 20

Concentration in the Indian steel industry

% capacity with Top n players

-10%

-5%

0%

5%

10%

15%

20%

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Major 4 Rest

% growth in steel output (YoY)

Major 4: JSW + SAIL + TATA + JSPL

Long tail: 308 sponge iron units feeding into

1,100+ induction furnaces

The top five players account for almost half

of the total installed capacity

17 March 2017


Longs and flats: two equal halves

We next move to looking at the finished output: India's 90 mt output is spread almost uniformly between long and flat products, with longs now inching slightly ahead (Figure 26). Interestingly, this output (and likely consumption) profile closely mirrors the global trend (Figure 23).

Figure 22: Roughly 50:50 split between flats & longs Figure 23: Global production is also equally split

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: World Steel Association, Credit Suisse estimates

Within longs, four-fifths of the domestic output is in the form of bars and wire rods. In India,

structural (heavy and light sections) form another 17% of output and the rest is in the form

of rails (SAIL, JSPL being the key suppliers in that segment, Figure 24). This output mix is

also closely mirrored by the global trends (Figure 25) as per data from the World Steel

Association. Bars and rods form 74% of the output and structurals form another 13%.

Figure 24: Longs: 80% of output is bars & rods Figure 25: Split of global longs output

Source: Ministry of Steel, JPC, Credit Suisse estimates Source: World Steel Association, Credit Suisse estimates

On the flats side, half of the output is in the form of HR coils/strips/sheets and another third

in the form of value added flats (either in the form of cold-rolled steel or as

galvanised/coloured sheets, Figure 26). A clear divergence in India's output compared to

40%

44%

48%

52%

56%

60%

0

20

40

60

80

100

2012 2013 2014 2015 2016

Longs Flats % longs

mt

0%

25%

50%

75%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Long Flat

Bars & rods81%

Structurals17%

Rails2%

Total longs output (alloy + non-alloy) in FY16: 47.4mt

Conc. Reinforcing

bars33%

Wire rods24%

Other bars17%

Light sections8%

Heavey sections

5%

Rails1%

Other long products

12%

For 809mt of global longs output (2015)

Production wise, there is a roughly 50:50 split between flats & longs;

ditto globally

Four-fifths of the domestic longs output

is in the form of bars and wire rods

17 March 2017


the global output profile for flats (Figure 27) is the difference in plates—10% in India vs

almost 33% globally.

Figure 26: Flats: HR forms half of the output Figure 27: Plates appear much more dominant


Longs almost fully insulated; flats impacted by China

Looking at the last five years of data, we segregate different long and flat products by the

growth in demand and domestic supply. JPC data adjusts for import-export, double-

counting and inventory changes to compute apparent consumption. If we were to plot that

with growth in output, the domestic industry has closely met demand most notably for long

products like structural and bars/rods (Figure 28). For most other product categories,

domestic output has lagged demand growth with imports seeing a rise.

Figure 28: Structurals demand fastest growing; HR

coils/GP/GC sheets also rising at ~8-9%

Figure 29: Longs insulated from imports; plates and

CR had weak demand + elevated imports till 2016


A glance at Figure 29 clearly shows that long products have barely seen any imports (<5%

of domestic demand). Imports have been particularly high for HR, CR and plates (10-20%)

of imports) during the 2012-16 period before the government started putting import curbs.

The imports of CR and plates particularly hit the industry hard as the domestic demand

HR Coil/ Strips/ Sheets52%

GP/GC sheets/coil

16%

CRC/ CR sheets16%

Plates10%

Pipes (large dia.)5%

Other1%

Total flats output (alloy + non-alloy) in FY16: 43.6mt

HR Coil, sheet, strip46%

HR Plates33%

Other flats21%

For 737mt of global flats output (2015)

Bars/ rods

Structurals

Rail

Plates

HR Coils/ sheets

CR Coils/ sheets

GP/GC

Electr.sheets

Tin plates

Pipes

-6%

-3%

0%

3%

6%

9%

12%

-6% -3% 0% 3% 6% 9% 12%

Domestic consumption growth (2012-16)

Dom

estic

pro

duct

ion

grow

th (

2012

-16)

Bars/ rodsStructuralsRail

Plates

HR Coils/ sheets

CR Coils/ sheets

GP/GC

Pipes

0%

5%

10%

15%

20%

25%

-2% 0% 2% 4% 6% 8% 10% 12%

Domestic consumption growth (2012-16)

Impo

rts

as %

of c

onsu

mpt

ion

(cum

u., 2

012-

16)

Longs are not very well traded; hence

dependent on domestic demand

17 March 2017


was anyways weak. Cold-rolled steel has usually been a commonly imported item (Figure

30) but the surge post 2014 hit domestic players hard, given pricing also came under

pressure during this time period. It is important to distinguish these imports with those of

special types of steel (electric/tin plates, see Figure 31) where we believe local capacity is

insufficient to meet domestic demand.

Figure 30: CR commonly imported; imports surged

post 2014-16 forcing government to put curbs

Figure 31: Special types of steel (electric/tin plates)

have traditionally been imported


For most products other than certain special steel products, there is ample domestic

capacity available in India. Overall utilisation levels have been improving but still remain

below 80% (in terms of steel making, Figure 32). Utilisation levels at cold-rolling mill stood

at 70% at the end of FY16, implying that imports pre-2016 were more a case of cheaper

imports flooding domestic markets (Figure 33).

Figure 32: Utilisation levels no longer falling Figure 33: Downstream utilisation at 70-75%


It is also worth noting that a big pocket of underutilisation still exists at sponge iron mills

(near-50%) and electric arc furnaces (sub-70%). This could keep longs pricing in check,

despite minimal threat of imports in that category.

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015 2016

Plates HR Coils/ sheets CR Coils/ sheets GP/GC

Imports as % of domestic demand

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2012 2013 2014 2015 2016

Electr.sheets Tin plates

Imports as % of domestic demand

40%

50%

60%

70%

80%

90%

100%

2015 2016

Upstream Downstream

Downstream utilisation levels at 70-75% in

FY16; these would have improved in the last 11

months

17 March 2017


Capacity addition flat heavy; exports remain key With the detailed industry structure in place, we move to drawing conclusions on pricing

for various sub-segments, depending on how the supply could potentially change in each

of them. As mentioned in the first section, India's steel industry is approaching the end of a

big wave of capacity expansion. Most notable additions would be from SAIL's and JSPL's

end in FY18.

New capacity mostly flat-focused

Starting March 2016, we see at least 20 mt of capacity getting added to the system by the

major players (including NMDC's 3 mt steel plant, Figure 34). Given more blast furnace

capacity is being added, downstream addition is also going to be flat-heavy, as scale is

key for flats production. We expect almost two-thirds of new crude steel output to be

directed towards flat-producing continuous casters/slab casters (Figure 35).

Figure 34: ~20 mt of capacity additions (FY17-19)… Figure 35: …mostly focusing on flats


FY16 saw major capacity addition from JSW Steel (towards the end), followed by Tata

Steel adding 3 mt in FY17. Going forward, a bulk of the capacity addition would be from

SAIL, JSPL and NMDC.

Given plant-level complexities for SAIL, we looked at the company's projected change in

mix from end-2016 to eventually post the completion of the modex (modernisation-cum-

capital expenditure) spread over its saleable steel output ramp-up from 12.4 mt to 20.2 mt

(Figure 36). We would like to particularly highlight 1.2 mt of plate output amidst flat end-

demand for plates in the last four years (see Figure 29). The addition on the longs side is

largely domestic demand dependent: while structural sections see strong growth, the

demand has been a bit weak for bars/rods. For rails, there has been barely any demand

growth. Given only one major buyer (Indian Railways) and a few small orders from Middle-

East, we could see continued low levels of utilisation.

JSPL is also at the cusp of adding capacity at its Angul plant in Odisha (see our note, for

more details on the facility). It already has ~4.2 mt of casting capacity and we believe, with

increased hot metal/steel output in the coming months, JSPL may choose to add some

more billet casting capacity sometime over the next 1-2 years (Figure 37). Just like SAIL,

we see JSPL too adding more plates output. We remain cautious on a quick ramp-up of

122

9

6

5

142

110

120

130

140

150

FY16-end FY17 adds FY18 adds FY19 adds FY19-end

Tata's KPO, SAIL (RSP, ISP) and JSPL

SAIL and JSPL (Angul)

NMDC's 3mtpa Nagarnar plant, SAIL (BSL)

mt

Flats67%

Longs33%

Split of 20mt of incremental capacity additions since Mar-16

We see at least 20 mt of capacity getting added, 67% of which, would be

flats

JSPL is also at the cusp of adding

capacity at its Angul plant in Odisha

https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&sourceid=em&document_id=1072241701&serialid=FSkUDIkXQebHLf%2bCg5ao%2bbnBjukxnu%2bBakwwtQ6BceY%3d

17 March 2017


the plate capacity, and hence, keep FY18E crude steel output for JSPL at 4.6 mt,

meaningfully lower than management guidance.

Figure 36: SAIL: plates/rail capacity could take time

to ramp-up (weak demand)

Figure 37: JSPL: longs capacity could ramp up,

plates remain a weak segment


NMDC's 3 mtpa Nagarnar steel plant is almost fully flat focused (Figure 38). The output is

expected to be not just plain-vanilla HR, but also special grades used in oil and gas, LPG

cylinders, autos, etc. However, we believe meaningful output from the NMDC plant could

only come by end-FY19 as the green-field plant (hot metal generation as well as

downstream mills) stabilises. The potential change in owner (NMDC is on the lookout for a

strategic investor willing to purchase the half-built plant) could also have an impact on the

commissioning timeline.

Figure 38: A wide variety of flat-focused products expected from NMDC's plant

Product Capacity (in kt)

HR Plates 800

API grade 500

HR Sheets 200

LPG Cylinder grade sheets 200

HR Coils 946

High Carbon Steel 50

Silicon Steel 100

Automotive steel 50

Other 154

Total Finished Steel 3,000

Source: Company data, Credit Suisse estimates

Despite the heavy addition of flats capacity, we are not concerned about pricing given the

option to export out at reasonable margins. We look at exports and regional realisations next.

Exports key for flats; pricing dependent on China

Post the barrage of duties (minimum import price, anti-dumping, safeguard), imports into

India have declined meaningfully. At the same time, the revival in prices has helped

exports. India is set to turn a net steel exporter in FY17 (Figure 39) albeit with a small

quantum.

0.4

1.2

1.7

0.7

2.0

2.5

0.8

7.8

0

1

2

3

4

5

6

7

8

9mn t

Incremental output for SAIL (chg. from FY16)

Saleable steel capacity rising from 12.4mt to 20.2mt

Flats

Longs

0.80.8

1.4

2.0

0.6

4.0

0

1

2

3

4

5

6

Current Outputat Angul

Slab caster Billet caster Billet caster(optionality)

Final

Incremental output for JSPL's Angul

Longs

Post the barrage of duties (minimum

import price, anti-dumping, safeguard),

imports into India have declined meaningfully

17 March 2017


However the current run-rate as seen so far in CY17 point to a near 4 mt annualised net

exports (Figure 40). This takes significant pressure off from domestic oversupply.

Figure 39: India to become a net exporter in FY17 Figure 40: Current net exports annualising at ~4 mt

Source: Steelmint, Ministry of Steel, Credit Suisse estimates Source: Steelmint, Ministry of Steel, Credit Suisse estimates

Flats are de facto, the most commonly traded items. Starting end-2015, imports started to

moderate, with a step-down impact clearly visible from March 2016 onwards, after the

imposition of the Minimum Import Price (MIP, Figure 41).

At the same time, exports started to lift (Figure 42) across sub-categories within flats, led

by hot-rolled and galvanised steel.

Figure 41: Step-down in imports in Mar-16 post MIP Figure 42: Exports led by HRC, value-added flats

Source: Steelmint, Ministry of Steel, Credit Suisse estimates Source: Steelmint, Ministry of Steel, Credit Suisse estimates

The key reason behind the pick-up in exports has been the improvement in prices across

regions globally (Figure 43). This has been on the back of an improvement in Chinese

domestic demand that has shifted Chinese mills' output away from the export market to

the domestic. Compared to a peak 120 mtpa Chinese net steel export run-rate seen in

September 2015, current levels have almost halved since then (Figure 44 ). Given CS

house view is that end-demand in China is set to remain strong throughout 2017, we could

see weak exports and thus, minimal disruption to the rest of the world prices this year.

-4

-2

0

2

4

6

8

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Imports Exports Net imports (RHS)

mt

-4

0

4

8

12

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

Net steel imports for India (ann. Run rate, mt)

0

200

400

600

800

1,000

1,200

0

200

400

600

800

1,000

1,200


HRC/ Plate CRC Galvanized steelElectrical steel Others Imports

kt kt

0

200

400

600

800

1,000

1,200

0

200

400

600

800

1,000

1,200


HRC/ Plate CRC Galvan.Electri. Others Exports

kt kt

Falling imports, rising exports: double benefit

for domestic flats manufacturers

17 March 2017


Existing high levels of utilisation coupled with the on-going push to cull steel capacity

should keep the pricing power of steel mills high. Thus, steel prices look unlikely to crash

anytime soon.

Figure 43: Prices now stabilising at a new normal Figure 44: Chinese exports have fallen sharply

Source: The BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source: The BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

In India, we are seeing a bit of divergent trends between the prices of longs and flats. Flats

prices have come off a bit from its January highs in the last one month or so. This could be

due to the dealers liquidating inventory from marked high levels of December (steel mills

pushed inventory in 3Q, given dealer willingness to buy ahead of the January price hikes).

It is worth repeating that imports are still not trickling-in. At current prices, only the 12.5%

import duty is effective, as India imposes anti-dumping/safe-guard duties only when the

CIF price is below a certain threshold (Figure 45).

Figure 45: Protectionism in flats: at current prices

only import duty matters

Figure 46: Landed imported steel prices at a

premium to domestic HR prices

Source: Ministry of Steel, Ministry of Commerce, Credit Suisse estimates Source: Bloomberg, Steelmint, , Credit Suisse estimates

If we look at import parity prices, then domestic HRC prices are at a US$30-55/t discount

to imports from Russia and China (Figure 46). Thus, domestic manufacturers could in

theory take Rs2,000-3,500/t hikes, provided the hikes get absorbed domestically.

200

300

400

500

600

700

800

900

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Steel Price ($/t): China US N. Europe

-20

0

20

40

60

80

100

120

140

Jan-07 Mar-08 May-09 Jul-10 Sep-11 Nov-12 Jan-14 Mar-15 May-16

Net Chinese Steel exports (month day adj. fig. annualized)

mt

0

100

200

300

400

500

600

700

800

350 370 390 410 430 450 470 490 510 530 550 570 590

CIF Price Import Duty AD Duty SG Duty

Landed import price (US$/t) for varying CIF price of HR steel

24,000

28,000

32,000

36,000

40,000

44,000

48,000

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

From CN From RU Mumbai

For hot-rolled coils

In India, we are seeing a bit of divergent

trends between the prices of longs and

flats

17 March 2017


Similarly, domestic CR prices are at an even steeper discount of US$70/t (Figure 47) vs

imports from China and ~US$40/t when compared with imports from Russia.

Indian steel mills can always choose to export the produce at US$30-40/t lower

realisations in the export market. Port side manufacturers like JSW (and now Tata, with

Kalinganagar ramp-up) have an advantage on that front.

Figure 47: Scope for domestic prices hikes on CR

even higher at US$70/t

Figure 48: Longs prices catching up; of late some

weakness in flats prices

Source: The BLOOMBERG PROFESSIONAL™ service, Steelmint, , Credit Suisse estimates Source: The BLOOMBERG PROFESSIONAL™ service, Steelmint, , Credit Suisse estimates

At the same time, longs prices have started to pick-up (Figure 48): there is an element of

cost push recently—domestic ore prices have risen at both NMDC as well as domestic

miners (making sponge iron costlier) and so has the e-auction premium on coal. 4Q is also

typically a strong month for construction activity in India and thus, pricing could be getting

support from end-demand as well.

Domestic demand revival key for longs

Figure 49: Capacity addition spree coming to an end

soon; industry could start seeing higher utilisation

Figure 50: Engg. & fabrication and real estate matter

most for steel demand

Source: Company data, Credit Suisse estimates Source: Ministry of Steel, Credit Suisse estimates

24,000

28,000

32,000

36,000

40,000

44,000

48,000

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

From CN From Ukr Mumbai

For cold-rolled coils

300

350

400

450

500

550

600

Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17

Longs (Dealer level, pre-taxes, US$/t) Flats

Engg. & fabrication

43%

RE Construction

29%

Infrastructure12%

Energy4%

Automotive3%

Railways2%

Packaging2%

Other5%

Split of 82mt of real end-demand for steel (2016)

Scope for domestic HRC prices to rise by

US$30-50/t, if domestic demand remains

supportive

17 March 2017


We see a major capex cycle coming to an end soon for the Indian steel industry (Figure

49) with SAIL and JSPL now inching closer to commissioning. With that, utilisation levels

should start inching up in the next 2-3 years before Tata/JSW announce the next wave of

growth capex.

As per the data from the Ministry of Steel, engineering and fabrication (white goods, yellow

goods, capital goods) and real estate account for almost 70% of India's steel demand

(Figure 50). Infrastructure, autos, railways, etc., account for the remaining 30%.

With regards to the Indian supply-demand scenario, we build in a modest 3-5% growth in

steel demand for FY18-19 (Figure 51). With production expected to grow by 6-7% (we

assume new capacity runs at 50% utilisation in the first year of commissioning), we get a

net export requirement of 3-6 mt in each of the next two years, which is not very different

from the current run rate (see Figure 40).

Figure 51: Dependence on exports to raise

in mt 2013 2014 2015 2016 2017e 2018e 2019e Remarks

Capacity 97 101 110 122 131 137 142

Production 82 88 89 90 99 105 112

% growth YoY 11.1% 7.3% 1.5% 0.9% 9.9% 6.3% 6.7%

Eff. Utilization 84% 87% 81% 74% 76% 77% 79% Assumes new capacity at 50% utilisation

Net imports 2.6 -0.5 3.7 7.6 -0.3 -3.6 -5.6 FY18E exports match current run rate

App. Consumption 84 87 93 97 98 101 106

% growth YoY 11.2% 3.4% 6.4% 5.1% 1.0% 3.0% 5.0% Assuming gradual normalization in demand

Source: Ministry of Steel, Credit Suisse estimates

Eventually, we expect domestic steel demand to normalise to ~6.5% levels, based on our

bottom-up assessment as shown in Figure 52.

Figure 52: We expect India's steel demand to normalise to ~6.5% levels (vs ~4% in the last three months)

Consumption

(2016, mt) CS growth

assumption What it includes? Remarks

Total 81.5 6.5%

Engg. & fabrication 35.0 7.0% Capital goods, cons. durables, yellow goods In-line with GDP growth

RE Construction 23.5 5.0% Residential, Commercial Subdued, low cost housing not as steel intensive

Infrastructure 9.5 9.0% Highways, airports, urban infra, steel Higher than GDP growth, given infra deficit

Energy 3.0 3.0% Power, wind-mills Not much of capacity addition required

Automotive 2.5 9.7% Cars, 2W, CVs, tractors Bottom-up estimate; import substitution likely

Railways 2.0 7.0% Rail tracks, rolling stocks, wagons

Packaging 2.0 7.0% LPG cylinders, grain bins

Other 4.0 6.0% Ship building, oil & gas pipelines, defence

Source: Ministry of Steel, Credit Suisse estimates

We build in a modest 3-5% growth in steel

demand for FY18-19, but in theory, the steel

demand should normalise to ~6-7%

levels in the long run

17 March 2017


Valuations aren't stretched yet

EV up only 20% in one year; debt concerns receding

For stocks that are already up 40-100% since January 2016, maintaining a bullish view

comes with its own perils. However, if we look at the EV, the changes have been less

drastic, thanks to the high financial leverage.

Figure 53: One year move in EV has been

remarkably homogenous (barring JSPL)

Figure 54: EV/t (based on crude steel capacity)

remains within rational limits

Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates Source: Bloomberg, CS RAVE, Company data, Credit Suisse estimates

Over the last one year, we have seen a near consistent 20% rise in EV for Tata, JSW and

SAIL (Figure 52). JSPL's EV is up only ~12%, as longs prices struggled for most of CY16.

However, if we see EV/t (capacity basis), Tata/JSW/JSPL are all trading marginally below

the replacement cost of US$800-1,000/t, indicating that valuations are not stretched as yet

(Figure 53). At the same time, balance sheet concerns have also retreated: Net debt to

EBITDA has fallen across companies (Figure 54) and coverage ratios have also improved

(Figure 55).

Figure 55: Net-debt to EBITDA has improved Figure 56: Coverage rations have also improved


21% 23%

12%

20%

48%42%

108%

40%

0%

20%

40%

60%

80%

100%

120%


EV Mcap

753 764 751

470

0

200

400

600

800

1,000


EV/t

Replacement cost for the industry: $800-1,000/t

US$/t

Discount to peers, structurally high costs, barely any EBITDA at curr. prices

4.8x

3.9x3.2x

6.6x

0.0x

3.0x

6.0x

9.0x

12.0x

Tata Steel JSW Steel (incl.accept.)

JSW Steel (w/oaccept.)

JSPL

Mar-16 Now 1-Year from now

0.0x

1.0x

2.0x

3.0x

4.0x

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17

Tata Steel JSW Steel JSPL

Interest coverage (EBITDA: interest, quarterly)

EV for Tata/ JSW/ SAIL is up ~20% in the last

one year

Strong EBITDA growth: valuations have only

improved on EV-EBITDA basis vs last

year!

17 March 2017


EV-EBITDA remains a misleading parameter

We believe the EV-EBITDA measure continues to be misleading: Given the strong jump in

EBITDA, steel plays are now relatively cheaper on EV-EBITDA vs one year ago (Figure

56). This is despite the 40-108% rise in stock prices. However, at an absolute level of 7x-

8x, EV-EBITDA valuations do not quite appear mouth-watering cheap yet. Indian names

appear to be trading at a premium to regional peers on EV-EBITDA, which is justified

given the scope for production ramp-up from existing levels (Figure 57).

Figure 57: More sane EV-EBITDA now vs one year ago Figure 58: EV-EBITDA: At a small premium vs peers


Even a small US$10/t up move in ASP adds 11-19% upside (at 7x EV-EBITDA) to our

buys: Tata/JSW/JSPL.

JSW/ Tata well placed on the P/B vs RoE framework

Figure 59: Both JSW/ Tata well placed vs. peers on P/B vs. RoE

Source: The BLOOMBERG PROFESSIONAL™ service, CS RAVE, Company data, Credit Suisse estimates

When measured on P/B vs RoE, JSW Steel comes across as particularly cheap, while

Tata Steel looks in line with the peers (Figure 58).

7.6x7.1x

6.4x

8.2x

9.4x

0.0x

3.0x

6.0x

9.0x

12.0x

Tata Steel JSW Steel(incl. accept.)

JSW Steel (w/oaccept.)

JSPL SAIL

Mar-16 Now

226x

4.1

5.8

6.2

6.2

6.4

6.4

6.4

6.7

6.8

7.4

7.6

8.2

8.4

9.4

10.5

0 3 6 9 12

ArcelorMittal

Maanshan-H

Angang-H

Hyundai Steel

JSW Steel

Voestalpine

POSCO

Baosteel

Gerdau

US Steel

Tata Steel

JSPL

Nucor

SAIL

Usiminas

Fwd. EV/EBITDA

Median: 6.7x

Usiminas

JSPL

Hyundai SteelPOSCO

SAIL

Gerdau

ArcelorMittal

BaosteelAngang-H

Maanshan-HVoestalpine

Tata Steel

JSW Steel

CSNUS Steel

Nucor

-4%

0%

4%

8%

12%

16%

20%

24%

0.0 0.5 1.0 1.5 2.0 2.5

Price to Book (P/B)

Ret

urn

on E

quity

A small US$10/t up move in ASP adds 11-19% upside (at 7x EV-EBITDA) to our buys:

Tata/JSW/JSPL

17 March 2017


It is also worth noting that the last time when prices were around similar levels, the steel

stocks have traded at a higher EV/t (Figure 59).

Figure 60: Tata/JSW have traded at higher EV/t in the past

Source: The BLOOMBERG PROFESSIONAL™ service, CS RAVE, Company data, Credit Suisse estimates

0

300

600

900

1,200

1,500

1,800

2,100

200

300

400

500

600

700

800

900

Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15

HRC Steel price (LHS) EV/t for Tata Steel India (adj.) SAIL JSW Steel

EV/t (US$)$/t

17 March 2017


Asia Pacific/India Steel

Tata Steel Ltd (TISC.BO / TATA IN) Rating OUTPERFORM Price (16-Mar-17, Rs) 499.15 Target price (Rs) (from 560.00) 600.00 Upside/downside (%) 20.2 Mkt cap (Rs/US$ mn) 484,782 / 7,413 Enterprise value (Rs mn) 1,296,523 Number of shares (mn) 971.22 Free float (%) 68.0 52-wk price range (Rs) 500-296 ADTO-6M (US$ mn) 41.9 Target price is for 12 months.

Research Analysts

Ravi Shankar

91 22 6777 3869

[email protected]

Neelkanth Mishra

91 22 6777 3716

[email protected]

Prateek Singh

91 22 6777 3894

[email protected]

Improved confidence on India volumes; higher

EU spreads ■ Falling Chinese exports provide opportunities to Indian flat players.

With falling Chinese exports, Indian flat players are well positioned to benefit

from higher volumes at realisations that are not meaningfully lower than

domestic ASPs. Current Indian hot-rolled export offers are at US$500-510/t

vs domestic ex-works price of ~US$530/t.

■ Smooth ramp-up at Kalinganagar. With exports now a viable option,

securing incremental sales for the Kalinganagar output would not be an

issue, given its proximity to ports as well. We believe the facility can add 0.9-

1.1 mt of additional sales in FY18 vs the current fiscal.

■ EU steel spreads shooting up. EU spot steel spreads are almost US$100/t

higher compared to the 3Q average. Although coking coal prices have come

off, EU steel prices are holding up very well (now near ~US$600/t). While

Tata Steel Europe reported US$40/t of EBITDA in 3Q on account of lower

ASPs, the buoyant EU prices should start reflecting in P&L as Tata gradually

renegotiates its contracts (mostly auto, ~20-30% of volumes).

■ We see clear catalysts—UK pension resolution/JV in EU. Tata has

already moved its active employees from a defined benefit plan to a defined

contribution scheme and is now working at delinking the pension plan from

the business. Post that, the decks would be cleared for an eventual

JV/merger with ThyssenKrupp's EU steel division.

■ Valuation. We incorporate higher India volumes (FY18E of 11.9 mt from 11.4

mt earlier) and slightly better EU EBITDA/t (US$60/t vs US$57/t earlier). This

results in an 8% rise in FY18/19E EPS. Our new TP of Rs600 (at 1.5x P/B;

from Rs560) implies an EV/t of US$810, i.e., an 8% rise from current levels.

Given Tata Sons’ decision to reduce cross-holdings, the market should start

ascribing full value to Tata Steel’s near ~Rs42 bn stake in Tata Motors/ Tata

Chemical.

Share price performance

The price relative chart measures performance against the

S&P BSE SENSEX IDX which closed at 29,585.85 on

16/03/17. On 16/03/17 the spot exchange rate was

Rs65.4/US$1

Performance 1M 3M 12M Absolute (%) 5.7 20.5 66.8 Relative (%) 1.3 8.8 47.0

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 1,159,517.4 1,101,623.3 1,225,076.4 1,230,629.8 EBITDA (Rs mn) 63,858.0 134,480.8 164,261.9 168,694.0 EBIT (Rs mn) 13,039.6 79,570.5 106,988.0 110,651.3 Net profit (Rs mn) (30,493.2) (20,144.6) 45,953.9 48,795.1 EPS (CS adj.) (Rs) (31.01) (20.48) 46.73 49.62 Change from previous EPS (%) n.a. - 7.9 8.4 Consensus EPS (Rs) n.a. 21.14 45.12 52.78 EPS growth (%) n.m. n.m. n.m. 6.2 P/E (x) (16.1) (24.4) 10.7 10.1 Dividend yield (%) 1.6 1.6 1.6 1.6 EV/EBITDA (x) 19.6 9.7 7.9 7.5 P/B (x) 1.72 1.92 1.67 1.47 ROE (%) (10.2) (7.5) 16.7 15.6 Net debt/equity (%) 254.6 298.6 262.2 220.6

Source: Company data, Thomson Reuters, Credit Suisse estimates

17 March 2017


Tata Steel Ltd (TISC.BO / TATA IN)

Price (16 Mar 2017): Rs499.15; Rating: OUTPERFORM; Target Price: (from Rs560.00) Rs600.00; Analyst: Ravi Shankar

Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E

Sales revenue 1,159,517 1,101,623 1,225,076 1,230,630 Cost of goods sold 689,623 522,378 650,098 644,500 EBITDA 63,858 134,481 164,262 168,694 EBIT 13,040 79,570 106,988 110,651 Net interest expense/(inc.) 41,286 51,732 53,388 52,766 Recurring PBT 23,008 37,165 66,674 71,118 Profit after tax 7,959 13,920 45,705 48,546 Reported net profit 9,255 14,169 45,954 48,795 Net profit (Credit Suisse) (30,493) (20,145) 45,954 48,795

Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E

Cash & cash equivalents 115,783 89,816 81,060 111,397 Current receivables 117,012 111,169 123,628 124,188 Inventories 203,560 193,396 215,069 216,044 Other current assets 201,121 191,079 212,492 213,456 Current assets 637,475 585,461 632,249 665,085 Property, plant & equip. 812,636 831,739 858,479 864,450 Investments 20,845 20,886 20,927 20,968 Intangibles 130,722 127,779 124,835 121,891 Other non-current assets 30,821 26,168 23,518 19,566 Total assets 1,632,500 1,592,033 1,660,008 1,691,960 Current liabilities 549,142 521,180 560,131 560,213 Total liabilities 1,330,969 1,319,509 1,350,209 1,342,040 Shareholders' equity 284,789 255,782 293,057 333,178 Minority interests 16,542 16,542 16,542 16,542 Total liabilities & equity 1,632,500 1,592,033 1,660,008 1,691,960

Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E

EBIT 13,040 79,570 106,988 110,651 Net interest (41,286) (51,732) (53,388) (52,766) Tax paid (15,050) (23,245) (20,969) (22,571) Working capital (20,041) (5,413) (14,844) (668) Other cash & non-cash items 63,622 30,173 70,598 71,524 Operating cash flow 284 29,353 88,384 106,170 Capex (48,894) (70,000) (77,056) (57,056) Free cash flow to the firm (48,610) (40,647) 11,327 49,114 Investing cash flow (44,240) (66,458) (78,461) (57,159) Equity raised 9,548 (1,091) (907) (903) Dividends paid (7,760) (7,771) (7,771) (7,771) Financing cash flow 57,243 11,138 (18,679) (18,674) Total cash flow 13,287 (25,967) (8,756) 30,338 Adjustments 0 0 0 0 Net change in cash 13,287 (25,967) (8,756) 30,338

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 983 983 983 983 EPS (Credit Suisse) (Rs) (31.01) (20.48) 46.73 49.62 DPS (Rs) 7.99 8.00 8.00 8.00 Operating CFPS (Rs) 0.29 29.85 89.87 107.96

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue (16.2) (5.0) 11.2 0.5 EBIT (75.9) 510.2 34.5 3.4 EPS 22.3 33.9 328.1 6.2 Margins (%) EBITDA 5.5 12.2 13.4 13.7 EBIT 1.1 7.2 8.7 9.0

Valuation (x) 03/16A 03/17E 03/18E 03/19E

P/E (16.1) (24.4) 10.7 10.1 P/B 1.72 1.92 1.67 1.47 Dividend yield (%) 1.6 1.6 1.6 1.6 EV/sales 1.1 1.2 1.1 1.0 EV/EBITDA 19.6 9.7 7.9 7.5 EV/EBIT 96.0 16.3 12.1 11.4

ROE analysis (%) 03/16A 03/17E 03/18E 03/19E

ROE (10.2) (7.5) 16.7 15.6 ROIC 0.4 2.8 6.6 6.7

Credit ratios 03/16A 03/17E 03/18E 03/19E

Net debt/equity (%) 254.6 298.6 262.2 220.6 Net debt/EBITDA (x) 12.02 6.05 4.95 4.58

Company Background

Tata Steel Limited is a diversified steel producer. It has a global presence in 50 markets and manufacturing operations in 26 countries. It provides steel for different industries, which include construction, automotive, aerospace, consumer goods.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (Rs) 680.00

At a P/B of 1.7 (previous peak of 1.9x) times book value (last reported as per IndAS), Tata Steel would be valued at Rs680/ share

Our Grey Sky Scenario (Rs) 400.00

At a P/B of 1x (barely covers cost of capital) times last reported book value, Tata Steel would be valued at Rs400/ share

Share price performance

The price relative chart measures performance against the S&P BSE SENSEX

IDX which closed at 29,585.85 on 16-Mar-2017

On 16-Mar-2017 the spot exchange rate was Rs65.4/US$1

Source: Company data, Thomson Reuters, Credit Suisse estimates

17 March 2017


Companies Mentioned (Price as of 16-Mar-2017) Acerinox (ACX.MC, €13.495) Angang Steel Company Ltd (0347.HK, HK$6.2) Aperam (APAM.AS, €48.21) ArcelorMittal (MT.N, $9.19) Baosteel (600019.SS, Rmb6.91) BlueScope Steel (BSL.AX, A$13.25) Companhia Siderurgica Nacional (CSNA3.SA, R$11.42) Evraz (EVRE.L, 204.9p) Gerdau (GGBR4.SA, R$13.07) Hitachi Metals (5486.T, ¥1,619) Hyundai Steel Co. (004020.KS, W63,900) Industrias CH S.A.B. de C.V. (ICHB.MX, MXN116.86) JFE (5411.T, ¥2,042) JSW Steel Ltd (JSTL.BO, Rs192.3, OUTPERFORM, TP Rs240.0) Jindal Steel & Power Ltd (JNSP.BO, Rs128.0, OUTPERFORM[V], TP Rs150.0) Kloeckner & Co. (KCOGn.DE, €10.97) Kobe Steel (5406.T, ¥1,095) Maanshan Iron & Steel Co Ltd (0323.HK, HK$3.16) Magnitogorsk Steel (MAGNq.L, $7.74) Nippon Steel & Sumitomo Metal (5401.T, ¥2,681) Novolipetsk Steel (NLMKq.L, $18.6) Nucor Corporation (NUE.N, $63.45) Outokumpu (OUT1V.HE, €10.05) POSCO (005490.KS, W291,500) SSAB (SSABa.ST, Skr36.52) Salzgitter (SZGG.DE, €35.11) Sims Metal Management (SGM.AX, A$12.7) Steel Authority of India Ltd (SAIL.BO, Rs63.6, UNDERPERFORM, TP Rs35.0) Tata Chemicals (TTCH.BO, Rs580.45) Tata Motors Ltd. (TAMO.BO, Rs480.4) Tata Steel Ltd (TISC.BO, Rs499.15, OUTPERFORM, TP Rs600.0) Tenaris (TENR.MI, €15.01) Ternium (TX.N, $26.75) Thyssen Krupp AG (TKAG.DE, €23.315) United States Steel Corp. (X.N, $37.66) Vallourec (VLLP.PA, €5.363) Voestalpine (VOES.VI, €38.875)

Disclosure Appendix

Analyst Certification I, Ravi Shankar, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for JSW Steel Ltd (JSTL.BO)

JSTL.BO Closing Price Target Price

Date (Rs) (Rs) Rating

27-May-14 122.76 54.00 U

21-Oct-14 117.57 60.00

30-Jul-15 84.74 54.00

19-Apr-16 133.23 160.00 O *

27-Jul-16 173.83 200.00

01-Feb-17 197.25 240.00

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

O U T PERFO RM

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3-Year Price and Rating History for Jindal Steel & Power Ltd (JNSP.BO)

JNSP.BO Closing Price Target Price


02-May-14 238.90 237.00 N

07-Aug-14 282.60 254.00

24-Sep-14 189.70 158.00 U

05-Nov-14 162.40 158.00 N

29-May-15 119.40 85.00 U

13-Aug-15 68.45 56.00

19-Apr-16 69.25 85.00 O *

22-Aug-16 85.90 110.00

12-Dec-16 73.45 96.00

15-Feb-17 89.75 110.00

06-Mar-17 126.00 150.00


N EU T RA L

U N D ERPERFO RM

O U T PERFO RM

3-Year Price and Rating History for Steel Authority of India Ltd (SAIL.BO)

SAIL.BO Closing Price Target Price


29-May-14 87.90 30.00 U

10-Feb-16 37.85 27.00

19-Apr-16 44.45 35.00 *


UN D ERPERFO RM

3-Year Price and Rating History for Tata Steel Ltd (TISC.BO)

TISC.BO Closing Price Target Price


14-May-14 452.15 260.00 U

21-May-15 342.90 210.00

11-Aug-15 246.90 180.00

19-Apr-16 335.00 440.00 O *

10-Oct-16 417.40 500.00

14-Nov-16 426.85 515.00

08-Feb-17 470.70 560.00


U N D ERPERFO RM

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5% ; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned

17 March 2017


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Target Price and Rating Valuation Methodology and Risks: (12 months) for JSW Steel Ltd (JSTL.BO)

Method: Our target price of Rs240 for JSW Steel is based on a P/B valuation, assigning a multiple of 2.0x to the FY18 book value of JSW Steel. We use the P/B methodology instead of the traditional EV/EBITDA methodology, given the sustained downcycle in steel (resulting in depressed EBITDA) and the high financial leverage in the industry. Our OUTPERFORM rating is based upon this target price and reflects our expectation of a strong EBITDA growth in FY17/18 that should put concerns on JSW's debt on the back seat.

Risk: The risks to our target price of Rs240 and OUTPERFORM rating include: (1) steel price falling below our assumption in FY17/18; (2) withdrawal of domestic trade barriers (safeguard, anti-dumping duty) would be a big negative as almost all of JSW Steel's EBITDA is domestic; and (3) a rise in iron ore/coking coal costs in excess of what we have modeled-in.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Jindal Steel & Power Ltd (JNSP.BO)

Method: Jindal Steel & Power Ltd has mainly two business divisions: steel and power. Our target price of Rs150 is based on an SOTP (sum-of-the parts) approach, where we value the steel business with a multiple of 7.5x EV/EBITDA (enterprise value/earnings before interest and depreciation) on rolling four quarters and value the power division using a discounted cash flow methodology. We value overseas coal projects at 7.5x EV/EBITDA (next 4 quarters). Our OUTPERFORM rating is based upon this target price and reflects our expectations of a sustained strength in domestic steel prices driving a sharp recovery in steel EBITDA.

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Risk: The risks to our Rs150 target price and OUTPERFORM rating for Jindal Steel & Power Ltd include: (1) Fall in steel prices; (2) Adverse resolution of the coal block bid case; (3) steady state merchant power rates settling below our assumption.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Steel Authority of India Ltd (SAIL.BO)

Method: Our target price of Rs35 for SAIL is based on a P/B valuation, assigning a multiple of 0.4x (50% lower than its last 5-Yr avg.) to the blended book value of SAIL for the next 4 quarters. We use the P/B methodology instead of the traditional EV/EBITDA methodology, given the sustained downcycle in steel (resulting in depressed EBITDA) and the high financial leverage in the industry. Our UNDERPERFORM rating is based upon this target price and reflects our concerns on SAIL's poor profitability (struggling with negative/ near zero EBITDA so far in FY17).

Risk: The risks to our Rs35 target price and UNDERPERFORM rating for SAIL include: (1) steel price increasing beyond our assumption in financial year 2017; (2) coking coal price settling below expectations in FY17; (3) capacity expansion to 21.4 mn tonnes completing on time and the market ascribing value to the same.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Tata Steel Ltd (TISC.BO)

Method: Our target price of Rs600 for Tata Steel is based on a P/B valuation, assigning a multiple of 1.5x to the last reported book value of Tata Steel. We use the P/B methodology instead of the traditional EV/EBITDA methodology, given the sustained downcycle in steel (resulting in depressed EBITDA) and the high financial leverage in the industry. Our OUTPERFORM rating is based upon this target price and reflects our expectations of a sharp recovery in EBITDA due to rising domestic steel prices and improving steel spreads globally.

Risk: The risks to our Rs600 target price and OUTPERFORM rating for Tata Steel include: (1) steel prices failing to sustain current strength that is needed to pass on the coking coal price hikes; (2) coking coal price settling at above expectations; and (3) higher-than-expected pension liabilities in the European operations.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (JNSP.BO, JSTL.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (JSTL.BO) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (JSTL.BO) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (JNSP.BO, JSTL.BO) within the next 3 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (TTCH.BO, TAMO.BO, JNSP.BO, JSTL.BO, SAIL.BO, TISC.BO) Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (JSTL.BO).

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=283188&v=5hih3bxmhkscw7poqhs3uk5hg .

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