Steel industry in recovery mode with consistent rise in domestic demand
Domestic steel demand has spurted in April and May on back of an 8.5% YoY increase in steel consumption. There was no low base effect, as FY17 April and May saw output rise by 4.2%. The rising demand is not a one-off phenomenon as the last quarter of FY18 too saw a step-up in demand, taking full-year demand growth to 7.9%.
The growth in demand was mainly driven by the pick up in automobile sales. For instance, the top three commercial vehicle companies in India saw their sales in May increase by 50% over a year ago, with a similar increase in April. Besides, demand from infrastructure and real estate space is picking up as well with a gradual increase in new project launches.
Why is this important
- The government’s thrust on infrastructure projects and rising consumer spending (consumer durable and automobiles) are likely to contribute to domestic steel demand of 6-7% in the medium term, according to Icra Ltd.
- With increasing demand for steel and supply being limited, steel prices will continue to increase.
- With rising steel prices, steel manufacturer’s will benefit from higher revenues and margins.
Stocks to be impacted
With recovery in demand and increasing steel prices, we expect steel manufacturer’s like SAIL (CMP: 88.9, Mcap: 36,716.5 crores, P/E 7.2x FY20E), Tata Steel (CMP: 583, Mcap: 65,730.4 crores, P/E 7.9x FY20E) to be impacted positively.