>STEEL SECTOR (GOLDMAN SACHS)

Prefer steel over metals
We reiterate our preference for steel over base metals. Our incrementally bullish view on India Steel hinges upon : 1) strong demand momentum as we enter into steel-intensive phase of economic growth, 2) constrained supply response till 2011 and 3) tight market conditions in Asia, coupled with the rise in cash costs, leading to higher steel prices in Asia and consequently India. While there are concerns on rising raw material prices and potential impact on steel margins, we believe that against the backdrop of robust demand, Indian steelmakers are in an advantageous position, given access to low-cost captive iron ore and high leverage to rising prices. On the other hand, we believe base metal prices have run ahead of fundamentals, and we expect a pullback in the medium term.

Strike while the iron is hot; Steel over Metals; Buy JSW, Tata

Add JSW to Conviction Buy, U/G Tata Steel to Buy
We add JSW Steel (JSTL.BO) to the Conviction Buy List with a 12-m P/Bbased TP of Rs1,346 (from Rs1,199) as we continue to believe that it is in the best position to capitalize on a recovery in steel demand and pricing vs. its peers - we expect 40% EBITDA CAGR over FY09-FY12E, highest amongst peers. We upgrade Tata Steel from Neutral to Buy with a 12-m P/B-based TP of Rs702 (from Rs496) on sustained strong profitability at its India business and a constructive outlook for the European steel sector which drives our expectations of earnings recovery at Corus.

Add Nalco to Conviction Sell, Buy on Sterlite, off CL
We remove Sterlite (STRL.BO) from our Conviction Buy List, as we see better relative upside in JSW Steel. We reiterate a Buy on Sterlite with a 12-m SOTP-based TP of Rs962 (fromRs951), as we believe that the current valuation does not reflect the earnings upside from the power business. Its diversified exposure, low cost position, volume growth and balance sheet strength make it our top pick in base metals. We reiterate Sell on NALCO (NALU.BO) and add to the Conviction list with a 12-m PB based target price of Rs305. We believe that NALCO’s valuations at FY11E PB of 3.2x don’t justify its deteriorating fundamentals – limited volume growth,
muted aluminum outlook and frequent coal supply disruptions.

To read the full report: STEEL SECTOR