>INDIA STEEL (MORGAN STANLEY)

Stay Constructive for Medium-Term Rewards

We retain our In-line view on the India Steel industry; Tata and JSW OW: Despite the run-up JSW and Tata Steel have enjoyed in the past six months (outperforming the Sensex by 102% and 51%), we see further upside potential in both stocks from a medium-term perspective, thanks to strong volume growth and high steel price sensitivity. Tata should also benefit from ongoing restructuring at its European operations. SAIL has performed in line with the market for the period and may continue to do so as we believe its sluggish volume growth shall disappoint the Street.

Increases in our price assumptions for steel boost our F10 and F11 estimates despite hikes assumed in key raw materials: This is in line with our global mining team’s forecast changes (key inputs include iron ore and reductants). Accordingly, our EPS forecasts for F10 and F11 have risen by 12% to 28%. We also introduce F12 forecasts for SAIL, Tata and JSW, which imply YoY growth of 13%, 34% and 33%, respectively.

Key Debate #1: Can China’s steel surplus derail the nascent steel price recovery globally? Many are apprehensive about this possibility, but we are not so concerned. We cite China’s lack of incremental slack capacity and likely revival in global industrial output.

Key Debate #2: Are capacity restarts in the West occurring at a speed that could deflate the recovery in the steel balance? We don’t think so, in contrast to the Street’s view. Capacity restarts are taking place quickly, but we believe that after a brief hiccup, steel supply will adjust. We see demand growth by the end of CY09 maintaining medium-term steel price strength.

Key Debate #3: What are the trends in global steel demand? It remains quite feeble, according to the market – but we see clear signs of overall recovery.

Catalysts: Further tightening in Indian steel market, leading to price increases in 1HCY10; 4QF10 results.

To see the full report: INDIA STEEL