The Directorate General (DG) of Safeguards attached to Indian Finance Ministry has recommended a provisional 20 percent safeguard duty for a period of 200 days on the common variety of hot rolled coil.
In an interview to CNBC-TV18, Chintan Mehta, analyst, Sunidhi Securities, shares his views on the recommendation and the impact it will have on metal stocks.
Below is the transcript of Chintan Mehta’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What is your sense would you pick up any of the stocks because of this? Do you think this kind of a safeguard percentage is enough for these guys to be able to make some EBIT?
A: I will answer your second question first regarding what kind of EBITDA impact this 20 provision duty would make 20 percent. Definitely for next three or four months you will find the premium getting reduced. A month back when we saw rupee at 64.50 per dollar and import duty at 10 percent the premium was around Rs 5,500-6,000. So, that was eventually reduced thanks to rupee depreciation and 2.5 percent custom duty.
However, with this 20 percent provisional duty we might see that Indian steel prices may start trading at discount compared to a premium a month back. We have done calculation which shows that Chinese prices would start trading at a premium of around Rs 1,400 with 20 percent safeguard duty and Japanese and Korean imports will start trading at a premium of Rs 2,000 odd. So, there is a case for a price hike for a near-term.
We need to remember that it is a provisional duty which may go off within 200 days and with no further extension of that safeguard duty or no case of imposing safeguard duty the company has to do away their own cost dynamics.
Latha: Stock-wise how would you react? Would you buy any stock?
A: JSW Steel seems to be the biggest beneficiary given share of hot rolled (HR) coils they have in their product portfolio. They have closed to 70 percent odd as HR coils followed by Tata Steel and then followed by Steel Authority of India (SAIL).
We expect around 9 percent kind of EBITDA jump purely for FY16. In Q1 company made and EBITA around Rs 4,800. We expect that they could take a price hike of around Rs 1,000-1,500 for remaining two or three months that could we see a 9 percent EBITDA jump followed by Tata Steel of 5 percent and followed by SAIL of 4 percent.
Sonia: Can you just give us some numbers if this 20 percent safeguard duty is imposed what will the landed price of hot rolled coil (HRC) Steel be and will it still be lower than the base average price because that is the sense we are getting that it perhaps it may not alleviate the stress of the companies because the landed price at whatever it is will still be lower than the base average steel price?
A: That is not the case. We have two segments of imports one from Chinese and one from Japanese and Korean guys. Before this 20 percent safeguard duty the premium was Rs 3,500, thanks to rupee depreciation and custom duty hiked which I mentioned earlier so that would completely narrow down because we may see around Rs 4,000 odd additional safeguard duty actually coming into levy. So, we will make a case for around Rs 1,000-1,500 imports will be getting more expensive so that is a boost kind of domestic companies would enjoy if the 20 percent safeguard duty and that is moreover to do with rupee depreciation as well.
Whether Japanese imports are concerned, we may see that Japanese imports will start trading at a premium of Rs 2 -2.5. So, I guess that would be quite suffice. Even a 15 percent safeguard could have been satisfactory but 20 percent is quite reasonable and gives a minor chance of a price hike to domestic steel makers at this point.
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