Export duty rollback — sentimentally positive but not a big driving factor: Brokerages

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Steel stocks were in the green after the central government announced a rollback of the duty imposed in May this year on exports of steel, iron ore, and pellets. However, most brokerages do not see the government move as a big driving factor and upside for domestic steel prices, which are already trading at a premium of 15-20 percent to landed imports.

Brokerages though have been positively surprised by the timing of this announcement but view the development only as sentimentally positive and not fundamentally drastic on the financials of the company.

Following are the key brokerage takeaways.

Jefferies

Views the Indian government's decision to scrap the 15 percent steel export tariff, imposed in May, as positive for the steel industry as it helps drive a recovery in export volumes and ease the oversupply in the domestic market. However, the brokerage says the move won't be a big driving factor for prices in the near term as domestic prices are already at a 15-20 percent premium to landed imports. The brokerage has a 'Hold' rating on Tata Steel and 'Underperform' on JSW Steel.

CLSA

Continues to maintain a cautious stance on the steel sector and doesn’t expect the decision to drive up Indian steel prices. The brokerage notes that domestic prices are at a sharp premium to both import and export parity, but does not expect the cut in the duty to drive steel prices upwards. Sees the rollback to be positive for iron ore and pellet prices and says broad-based policy stimulus in China — which is likely to drive steel prices higher — is the key determinant.

Macquarie Research

Views the decision as sentimentally positive for the near term and expects it to boost exports over the next few months. From an earnings standpoint, the brokerage expects this decision to a) Lend volume support, as Indian companies will now be price-competitive in export markets, and b) Lend some near-term support to domestic steel trade price. But, at the same time, it has warned removal/reduction of export duty on iron ore could pose an upside risk to domestic iron ore prices. The brokerage currently prefers Tata Steel in the ferrous space.

JP Morgan

Sees removal of export duties as sentimentally positive but doesn’t expect a hike in domestic HRC steel prices and earnings uplift in the near term. Also feels the fundamental earnings impact would depend upon a) Chinese demand improvement and b) Chinese HRC export price up-move.

BofA Securities

Views the timing as a positive surprise as the expectation of duty rollback was expected around Budget. Believes the measures to facilitate gradual export volume revival from depressed levels with increased export profitability. Expects the duty removal to help put a floor under the domestic prices with potential recovery in Q4FY23 and has raised earnings by 6-17 percent (FY24-25) and upside risk to prices from here.