See muted steel demand; sell SAIL, buy Tata Steel: Citi

Brokerage house Citi does not expect a significant uptick in domestic steel demand and prices. It has downgraded its rating on Steel Authority to ‘sell’ from ‘neutral’ and retained its buy on Tata Steel with a cut in earnings forecast, but raising target price to Rs 508 from Rs 430 earlier.

And while steel producers have announced a Rs 1000/tonne hike in hot rolled coil prices this month, Citi analyst Raashi Chopra is not certain if the hike can be enforced, given weak demand.

Steel consumption rose 4 percent during April-December this year, compared to 10.6% in FY11 and 5.5% in FY12.

"Pricing upside is capped as imports (+ 15% year-on-year in Apr-Dec12), particularly from China/FTA countries, are high (and could worsen if China increases exports/export rebates)," Chopra wrote in a note to clients.

Here is why Citi is bearish on SAIL and bullish on Tata Steel

"SAIL’s stock is up 12% over the past three months, in our view already discounting expectations of margin improvement in FY14 (higher volumes; lower coking coal costs). At 7.3 times FY14E EV/EBITDA (global average 6.5 times), valuations look stretched given limited upside to steel prices, downside risk to volumes (three successive years of declining volumes, inventory buildup), and cost concerns (uncertainty on wages)."

"While we cut earnings for Tata Steel, we see greater visibility for TSL's India’s earnings vs. other India steel makers as volumes have been more resilient.

As a bonus, TSL is an option on a European recovery/improvement scenario a USD 5 EBITDA/tonne swing in TSE impacts consolidated earnings by 11%."