Indian steel companies have raised prices by up to 10% this month, negating the partial rollback of the price hikes in February. Since both iron ore and coking coal prices have been on the rise, the move won’t lead to a rise in margins for all players, but would certainly come as a welcome relief. But, for Tata Steel Ltd, which relies on captive iron ore and coal for its Indian operations, the move will lead to better profitability.
While the steel minister has called for restraint in price hike, the finance minister has mentioned in his Budget speech that there is a need to confront oligopolistic tendencies in the steel sector. But the fact remains that India has become a net importer of steel and hence domestic prices are increasingly linked to international prices, which are rising.
A strong outlook on steel prices has caused Credit Suisse to rate all three steel companies under its coverage “outperform”. Till recently, it had neutral ratings on Tata Steel and Steel Authority of India Ltd (SAIL), but now the price targets on the firms have been raised by 23% and 37%, respectively.
Credit Suisse’s premise is that although demand growth may fall to the lowest in the last four years in 2008, supply will fall at a faster rate since China’s net exports are expected to fall by 20 million tonnes (mt). Shortages in coking coal will lead to a production shortfall of another 20mt. Demand is expected to pick up by a similar amount this year.
India’s three largest steel companies have fallen between 14% and 27% from their January highs. Tata Steel has fallen the least, followed by SAIL because of their captive iron ore resources. Tata Steel is also expected to gain from the high operating and financial leverage provided by Corus. Its foreign subsidiary’s fortunes swing wildly depending on steel prices. Given the current positive outlook on steel prices, the leverage is expected to work in Tata Steel’s favour.
Shares of JSW Steel Ltd, which has a higher dependence on imported coal, have fallen 27%, with a large part of it occurring since the rollback in price hikes in mid-February (see chart). The price increase taken this month could revive fortunes, especially for this stock.
ICICI Bank stock factors in steep discounts on investments
The disclosure of a Rs1,064 crore mark-to-market hit last Tuesday by ICICI Bank Ltd has led to a loss of Rs7,126 crore in its market capitalization since then. That’s a fall of 6.3%, compared with a decline of just 0.8% in the Sensex over the same two days.
It’s not as if investors had no inkling that ICICI Bank had been hit by mark-to-market losses: the bank had said in its conference call in January that it had already provided for losses of around Rs270 crore on account of credit derivatives. But the numbers now being mentioned are much higher. And with collateralized debt obligation (CDO) spreads widening again in February, it’s very likely the provisional estimates will rise by the end of the quarter.
It doesn’t really matter if the losses go through the profit and loss or not, or whether a part of it is in the bank’s subsidiaries, or whether it’s on account of credit derivative or bond valuations, because the net result is that it will reduce book value per share and therefore impact the stock’s valuation.
The new loss disclosures are of $190 million, or Rs760 crore or so, which works out to only about Rs6.8 per share. But the key assumption to be made while estimating the impact on the stock is the discount one should apply on the exposure to CDOs and to overseas bonds. The total losses of $265 million disclosed so far are a mere 4.5% on the total $5.9 billion exposure of ICICI Bank and its subsidiaries to CDOs and overseas bonds ($2.1 billion and $3.8 billion, respectively).
Yet, the current stock price of Rs960 is factoring in a fall of Rs32 in book value per share, assuming there is no change in the price-to-book multiple. (Although it must be noted the market may well assign a lower multiple after the discovery of higher mark-to-market losses.) This puts the discount on the total exposure at around 16%. That seems overdone, considering that these exposures are not credit risks.
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