>INDIAN STEEL(UBS)

􀂄 We believe the worst is over for the Indian steel industry
We believe the worst is over for the steel industry as: 1) steel prices should remain
firm globally (the global steel industry is operating at 55-60% capacity utilisation);
and 2) Chinese HRC prices increased in Q1 FY10 on robust demand, providing
support for domestic prices (import duty is 5%). We believe the Indian economy is
over the worst, based on the upturn in the UBS Lead Economic Indicator, Index of
Industrial Production, and strong cement and auto sales.
􀂄 Indian prices to remain firm; no significant overcapacity in next 2-3 years
We estimate Indian HRC prices at US$600/US$630 in FY10/FY11 (UBS China
steel analyst, Hubert Tang, estimates Chinese HRC prices at US$458/US$505 (ex-
17% VAT)) for FY10/11. The Indian steel industry is operating at 89% capacity
and we do not expect significant overcapacity between FY10-12. We estimate steel
demand will grow 7%/12% in FY10/11 (+5% YoY in Q1 FY10 versus -10% YoY
in Q4 FY09).
􀂄 Raw material costs have declined significantly from peak levels
Raw material prices have declined significantly. Coking coal has been renegotiated
to US$129 versus US$300/tonne previously (US$129/145/155 per tonne estimated
for FY10/11/12). In the current deflationary cost environment, JSW Steel (JSW)
and Tata Steel should benefit more than Steel Authority of India (SAIL) due to
their lower integration.
􀂄 Positive on JSW and Tata Steel
Our preferred picks are JSW (upgrade from Neutral to Buy) and Tata Steel. We
believe JSW is an attractive play on the domestic growth story. Tata Steel is
unlikely to have cash flow issues and the stock has priced in some pessimism, in
our view. We downgrade SAIL from Buy to Sell.

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