Hard To Be Positive On Steel Stocks Amid Global Uncertainty, Says Citi India Research Director

The latest announcement of tax rebate cut by China's finance ministry will bring limited upside for stocks in the sector, amid uncertainty over Donald Trump's policy action and China's reaction, according to Raashi Chopra, India research director at Citi.

It is hard to figure out what will change the game for Indian steel companies given their valuations, she said.

Metal stocks rose on Monday after China’s finance ministry scrapped its export tax rebate policy for aluminium, starting from Dec. 1.

While Chopra sees "LME (London Metal Exchange) upside on account of withdrawal", focus goes back on what Trump does, she said.

Citing Citi Research's view two months back, Chopra said she has neutral-to-bullish view on aluminium and is neutral on Zinc. But for commodity stocks, Trump and China's reaction to it is question mark.

"We have been negative on steel space," she said, but noted that in the non ferrous space she likes Vedanta Ltd. for company specific reasons, including restructuring, deleveraging and dividend yield story. Unless there is massive collapse in commodity prices, she continues to remain bullish on the stock.

China stimulus is disappointing, according to Chopra and it is very hard to figure out what is going to change game for steel in China and therefore India.

"India steel equities are 2-2.5 times Chinese valuations," she pointed out, adding that we are not isolated from China exports. "China, Japan, and South Korea are always going to export," she said.

She sees a little bit of growth angle but she is not sure if 2-10 times EV Ebitda multiples are warranted for these companies. "Even if there is a surprise stimulus, I don't know how that swings Indian equities," she said.

Regarding expected growth, on the flat product side, demand will have to grow at about 10% to absorb that supply in next two-three years, Chopra said. "That's not something we have seen in last few years. If that doesn't happen, Indian companies will have to start exporting, which is not the most lucrative way for them," she explained.

In the cement space Chopra is positive on Ultratech Cement Ltd., ACC Ltd., Grasim Industries Ltd., Shree Cement Ltd., and Ramco Cements Ltd. Despite having a negative and muted view on prices, Citi has buys on few stocks, given growth and cost benefits. She said that demand is not going to completely collapse, and it is not necessary that companies will have to transfer cost benefits if demand growth is there.