>Steel ( MORGAN STANLEY)

We continue to recommend caution regarding the
Indian Steel sector, more so after the recent
outperformance seen in the Sensex recently even as the
economic climate continues to slip. Our Cautious stance
is based on our belief that: 1) steel prices have more
downside from here in the next two quarters, bringing
many Indian companies close to losses; and 2) stocks
are not fully discounting trough-level earnings and
balance sheet pressure. We suspect that many
second-rung steel companies are already incurring
losses, which could be revealed in F4Q09. Results for
the next two quarters could act as catalysts for the
stocks.
A 30-year low in economic growth and a sustainable
rebound in steel prices at US$500/t do not make a
good pair. Our economists are now calling for just 0.3%
growth in C2009. Accordingly, we forecast the first
demand compression in the global steel industry since
1998, and a 10-year low capacity utilization level. We
are cutting our Indian steel price forecasts by 5-7% for
F2010-11 even as near-term news flow has improved
somewhat. A quick impact from global stimulus
packages may be the surprise element on the upside,
but the effects will have to be reflected in broader
economies before they will be seen in steel. We assign a
low probability to this event.

To read full report
Steel (JP MORGAN)