India’s steel industry produces roughly equal longs (52%) and flats (48%) products. 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. Falling Chinese exports should be a big plus for JSW/Tata. Output from the major 4 players has been consistently outpacing the rest of the industry and utilisations at JSW/Tata are now at 90%+, implying gains from operational leverage. While 67% of the incremental 20 MT capacity addition is in flats, buoyant regional prices should keep enabling exports.

Within longs, structural have seen healthy domestic demand (10%, 2011-16), but growth has been weaker- for bars/rods (+4%) and rails (1%). We would thus prefer flats over longs. On EV per tonne of capacity, Tata/JSW/JSPL are all trading marginally below the replacement cost of $800-1,000/tonne, indicating that valuations are not stretched as yet. We raise Tata Steel’s TP to R600 on likely higher output and better EU spreads.

With exports as an exit route (at realizations that are not meaningfully lower than domestic’s), oversupply in flats is not a concern.

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. Unlike non-ferrous (a consensus buy), Tata/JSW still have less than 50% buy ratings.