Ferrous Metals - Elara Securities - 20 January 2021

Ravi Sodah
ravi.sodah@elaracapital.com
+91 22 6164 8517 (Dir)
Ferrous Metals
Saurabh Mitra 20 January 2021
saurabh.mitra@elaracapital.com Elara Securities (India) Private Limited
+91 22 6164 8546 (Dir) Image source: Google
India | Ferrous Metals 20 January 2021
Initiating coverage
Ferrous Metals
Steely resolve Post crises demand recovers sharply
20 Post World Post Lehman Post
Meaningful recovery: world utilization to exceed pre-COVID in CY21 Trade Centre crisis COVID-19
15 attack
We expect global demand for steel may contract 1.2% YoY in CY20E 10
despite the COVID-19 crisis. However, the fall is still well below CY09’s
(%)
Global Markets Research
5
6.5% post the Lehman crisis. China accounts for more than half of 0
demand & production and its stimulus package of USD 500bn has been (5)
the key catalyst for demand recovery. China’s YoY production growth (10)
CY96
CY97
CY98
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20E
CY21E
CY22E
turned positive in April and remains positive with double-digit growth
in select months. We expect global demand to recover by 6.5% YoY and Steel growth Wold GDP growth
~4.0% YoY in CY21E and CY22E, respectively; thus, we expect rise in
Source: World Steel Association, Bloomberg, Elara Securities
world utilization from ~76% in CY20E to ~81% in CY21E and to ~84% Estimate
by CY22E. World utilization to reach 81% in CY21E
Going local: domestic demand to revert to ~14% YoY in FY22E Crude steel (mn tonne) CY19 CY20E CY21E CY22E
We expect domestic steel demand to shrink to ~11% YoY in FY21E but Capacity 2,362 2,421 2,421 2,441
bounce back to ~14% YoY in FY22E and ~8% YoY in FY23E, implying a Production 1,869 1,846 1,966 2,045
demand CAGR of 3.1% over FY20-23E. Recovery in key end-user
Capacity utilization (%) 79 76 81 84
industries, such as infrastructure, real estate, auto, consumer durables
Source: OECD, World Steel Association, Elara Securities
and capital goods, is likely to bolster demand. As per CRISIL, some key Estimate
government projects, namely Housing for All, Bharatmala, Sagarmala,
Current domestic steel prices at an all-
Jal Jeevan, Freight Corridor and Udaan, are likely to generate time high…
cumulative demand of ~105-124mn tonne. Further, new norms of 60,000
social distancing means less use of public transport and owning a
50,000
vehicle, thereby resulting a rise in demand for cold roil (CR) steel used
(INR/tonne)
in the auto industry. 40,000
Attractive proposition: firm input expenses to keep prices elevated 30,000
Current domestic and global iron ore prices are up ~88% YoY and ~78% 20,000
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
YoY, respectively. Domestic scrap prices also are up ~19% YoY while
non-coking coal is up ~3% YoY. We believe the rise in input cost, lower
inventory in channel and likely steel production cut in China during Domestic Landed cost - FOB China
Winter to curb pollution will sustain prices at higher levels in the Source: CRISIL, Elara Securities Research
medium term. HRC (Mumbai) prices have gone up to INR 10,375 per …iron ore prices surge on supply
tonne in the past three months. Price hike benefits would be reflected constraints
in P&L in H1CY21. 6,800
Early economy cycle play: top pick is Tata Steel 5,800

(INR /tonne)
4,800
We believe steelmakers with captive iron ore mines are better placed
3,800
than peers, given their margin is likely to strengthen further, due to firm
steel prices & stable cost, and they are unlikely to face production 2,800
constraints on lower availability of iron ore. Thus, Tata Steel is our 1,800
Jan-18
Oct-18
Jan-19
Oct-19
Jan-20
Oct-20
Jan-21
Apr-18
Jul-18
Apr-19
Jul-19
Apr-20
Jul-20
preferred pick in the ferrous metal space. Tata Steel’s focus on

deleveraging and exiting noncore assets augurs well. We initiate on
Lump ore Fines
Tata Steel & JSPL with a Buy rating and a TP of INR 860 and a TP of INR
Note: NMDC iron ore prices. Source: Company, Elara
353, respectively, on SOTP valuation for both. We initiate on JSW Steel Securities Research
and SAIL with an Accumulate rating and a TP of INR 443 on 7.0x FY23E Note: Due to reporting difference between global and India
EV/EBITDA and a TP of INR 77 on 5.0x FY23E EV/EBITDA, respectively. data, we use CY for global and FY for India
Key Financials
Company Ticker Rating Mcap CMP Target Upside EV/EBITDA (x) P/BV (x) ROE (x)
(INR bn) (INR) (INR) (%) FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E
JSW Steel JSTL IN Accumulate 926 383 443 15.7 8.0 6.9 6.3 2.3 2.0 1.7 15.9 17.4 17.2
Tata Steel TATA IN Buy 770 667 860 29.0 5.9 5.4 4.9 1.0 0.9 0.8 11.5 11.4 11.6
JSPL JSP IN Buy 288 282 353 25.0 4.7 4.9 4.2 0.9 0.9 0.8 13.2 9.5 10.1
SAIL SAIL IN Accumulate 272 66 77 16.9 5.9 5.1 4.6 0.7 0.6 0.5 8.3 9.8 10.5
Note: pricing as on 18 January 2021; Source: Company, Elara Securities Estimate
Ravi Sodah • ravi.sodah@elaracapital.com • +91 22 6164 8517

Saurabh Mitra • saurabh.mitra@elaracapital.com • +91 22 6164 8546
Elara Securities (India) Private Limited
Ferrous Metals
Table of Content
Meaningful recovery ……………………………………………………………………………………….. 3
Going local ……………………………………………………………………………………………………….. 5
Attractive proposition …………………………………………………………………………………….. 10
Early economy cycle play ………………………………………………………………………………. 14
Company Section
JSW Steel - Volume to take lead ……………………………………………………………………. 17
(JSTL IN, Accumulate, TP: INR 443, CMP: INR 383, Upside: 16%)
Tata Steel - Sweet spot …………………………………………………………………………………… 23
(TATA IN, Buy, TP: INR 860, CMP: INR 667, Upside: 29%)
Jindal Steel and Power - Deleveraging path ……………………………………………….. 29
(JSP IN, Buy, TP: INR 353, CMP: INR 282, Upside: 25%)
Steel Authority of India - Sailing on price buoyancy …………………………………… 35
(SAIL IN, Accumulate, TP: INR 77, CMP: INR 66, Upside: 17%)
2 Elara Securities (India) Private Limited

Ferrous Metals
Meaningful recovery
 Global demand CAGR of ~3% over CY19-22E
 Capacity increase by ~78mn tonne over CY19-22E
 Global utilization higher than pre-COVID levels in CY21
Demand bounces back post crises induced challenges, and, as per World Steel Association’s
(WSA) June 2020 Short Range Outlook (SRO), major end-
While world steel demand grew at a CAGR of ~5% over
user industries of steel in China were largely back to full
past 20 years it has moderated to ~3% over past five years
productivity by end-April. During May, China announced
primarily due to the decline in China’s steel demand in the
USD 500bn stimulus package to offset the impact of
Ferrous Metals
middle of past decade affected by the slowdown in
COVID-19, bolstering steel demand from real estate and
investments in China. Analysis of historical data shows
infrastructure sector during early CY20. Apart from that,
steel demand usually bounces back sharply post crises.
significant cash infusion by the government into the steel
For eg, demand CAGR of ~8% over CY01-04 post
market helped traders to hold onto mounting steel
economic slowdown after the attack on the World Trade
inventory. Some other government measures were 1)
Centre in CY01, and a demand CAGR of ~8% over CY09-
raising export rebate to 13% from 10% for several steel
12 post the Lehman debacle.
products from March to support steel exports amid the
Global demand CAGR of ~3% in CY19-22E pandemic, and 2) lowering the VAT rate for steelmakers
from 16% to 13% & simultaneously reducing VAT rate for
Despite COVID-19 induced disruptions, we expect
transportation and construction sector from 10% to 9%.
contraction in global steel demand to be restricted to 1.2%
YoY in CY20E vs 6.5% in CY09 post Lehman crisis. We WSA, in its June 2020 SRO, had forecast China steel
expect CY21E to turn positive and register a demand demand to grow ~1% YoY in CY20. However, strong
growth of 6.5% YoY, followed by ~4.0% in CY22E, demand from infrastructure, auto, home appliances and
implying a demand CAGR of ~3% over CY19-22E. other end-user industries bolstered performance of
China’s steel industry. Accordingly, WSA has revised
Exhibit 1: Steel demand bounces back sharply post
China’s steel demand to ~8% in CY20 in its October 2020
any economic slowdown
SRO. As per WSA’s November data, China’s crude steel
20 Post World Post
Trade Centre
Post Lehman crisis
COVID-19
production has grown 5.5% YoY during January-
15 attack November 2020 vs 1.3% YoY and 9.2% YoY dip in
10 production of world and the rest of the world (ROW),
respectively.
(%)
5
0 Exhibit 2: China accounts for more than half of global
(5)
steel demand
(10)
CY01
CY08
CY15
CY96
CY97
CY98
CY99
CY00
CY02
CY03
CY04
CY05
CY06
CY07
CY09
CY10
CY11
CY12
CY13
CY14
CY16
CY17
CY18
CY19
CY20E
CY21E
CY22E
ROW
28%
Steel growth Wold GDP growth
Source: World Steel Association, Bloomberg, Elara Securities Estimate

China
US 51%
Growth momentum in China to play a key role 6%
China plays a key role in the world steel industry, given its
India
highest capacity, production and demand contribution. 6%
As on CY19, it accounted for ~53% of global crude steel EU
9%
production while contribution to demand stood at ~51%.
China has shown a marked resilient against COVID-19 Note: as on CY19, ROW stands for rest of world, Source: World Steel
Association, Elara Securities Research
Elara Securities (India) Private Limited 3

Ferrous Metals
Exhibit 3: China’s YoY steel production growth above resulting in a likely rise in global steel capacity by ~78mn
the world’s and ROW tonne to ~2,441mn tonne by CY22E. Region-wise
40 capacity addition trend shows Asia and the Middle-East
may witness ~27mn tonne and ~19mn tonne of gross
20
capacity addition, respectively, over CY20-22E, while
(%)
0 additional ~3mn tonne and ~6mn tonne, respectively, is

in the planning stage. Therefore, Asia and the Middle-East
(20)
region are likely to witness meaningful capacity addition,
(40) if all ongoing and planned projects take place. Europe,
Jul-20
Mar-20
May-20
Sep-20
Jan-20
Feb-20
Nov-19
Apr-20
Jun-20
Aug-20
Dec-19
Oct-20
Nov-20
NAFTA, the African continent, the CIS, and Latin America
also could see an increase of combined ~11mn tonne of
World China ROW
gross capacity addition, which is currently under progress.
Source: World Steel Association, Elara Securities Research
Exhibit 4: China’s Jan-November crude steel

World utilization above 80% in CY21-22
production grows 5.5% YoY The gap between world capacity and production has
(mn tonne) Jan-Nov ‘19 Jan-Nov '20 YoY growth (%) narrowed in the past few years. Our analysis of data over
World 1,691.9 1,670.4 (1.3) CY16-19 suggests global crude steelmaking capacity
China 911.0 961.2 5.5 declined by a mere 0.3% vs a rise in steel production by
ROW 780.8 709.2 (9.2) ~15% during the same period. Consequently, global
Source: World Steel Association, Elara Securities Research utilization was on an uptrend, resulting in an
improvement in utilization from ~69% in CY16 to ~79% in
Exhibit 5: WSA June 2020 SRO vs October 2020
CY19. However, with an expected drop in crude steel
(mn tonne) Jun-20 Oct-20
production by 1.2% in CY20E, utilization is likely to fall to
World (6.4) (2.4)
~76% in CY20E but recover to ~81% in CY21E and ~84%
China 1.0 8.0
in CY22E.
ROW (14.2) (13.3)
Source: World Steel Association, Elara Securities Research Exhibit 7: Utilization to drop by ~300bp YoY in CY20E
Global capacity to rise ~78mn tonne by CY22E Crude steel
(mn tonne) CY16 CY17 CY18 CY19 CY20E CY21E CY22E
Our analysis of Organization for Economic Co-operation
Capacity 2,368 2,352 2,328 2,362 2,421 2,421 2,441
and Development (OECD) data shows projects for ~58mn
Production 1,627 1,730 1,814 1,869 1,846 1,966 2,045
tonne of gross capacity addition are currently underway,
Utilization (%) 69 74 78 79 76 81 84
which are likely to come on-stream over CY20-22. Another
Source: OECD, World Steel Association, Elara Securities Estimate
~20mn tonne of capacity addition projects are in the
planning stages, which can start during the same period,
Exhibit 6: World steel capacity to expand 2.5% to 3.3% by CY22E

Nominal Potential gross
Region % chg expected
capacity Var (%) capacity additions in Capacity in CY22E
(mn tonne) (CY19 vs CY22E)
CY20-22E
Underway Planned
CY18 CY19 (A) Low (A)+(B) High (A)+(B)+(C) Low High
(B) (C)
African continent 41.4 43.9 5.9 1.9 0.8 45.7 46.5 4.2 6.0
Asia 1,574.4 1 604.8 1.9 27.7 3 1 632.5 1 635.5 1.7 1.9
CIS 139.3 140.8 1.1 1.9 3.2 142.7 145.9 1.3 3.6
Europe 274.0 274.7 0.3 3.7 0 278.4 278.4 1.3 1.3
-EU 216.4 216.4 0.0 0.2 0 216.7 216.7 0.1 0.1
-Other Europe 57.5 58.2 1.2 3.5 0 61.7 61.7 6.0 6.0
Latin America 74.2 74.2 0.0 0.2 1.3 74.4 75.7 0.3 1.9
Middle East 62.3 65.1 4.5 19.6 6 84.7 90.6 30.1 39.3
NAFTA 156.5 152.6 (2.5) 3.3 5.9 155.9 161.8 2.1 6.0
Oceania 6.4 6.4 0.0 0 0 6.4 6.4 0.0 0.0
OECD/EU (0.5) 1.1 2.0
644.6 641.4 7 5.9 648.4 654.3
economies Total 0.0 0.0 0.0
Non OECD/EU
1,683.9 1,721.1 2.2 51.2 14.2 1,772.2 1,786.4 3.0 3.8
economies Total
World Total 2,328.4 2,362.5 1.5 58.2 20.1 2,420.6 2,440.8 2.5 3.3
Source: OECD, Elara Securities Research

Ferrous Metals
Going local
 India’s steel demand CAGR of 3.1% over FY20-FY23E
 Domestic steel capacity to expand ~25mn tonne by FY25E
 Utilization to touch ~80% by FY23E
Domestic demand at ~14% in FY22E Lower per capita consumption creates opportunities
After registering demand growth of 8-9% during FY18-19, India’s per capita consumption of steel is one-third of the
India’s steel demand growth moderated to ~1% in FY20, global average despite it is being the second-largest steel
primarily affected by the overall economic slowdown and market. In fact, per capita steel consumption is not only
the lowest among BRICS (Brazil, Russia, India, China &
Ferrous Metals
muted performance across key end-user industries. Pan-India
lockdown and challenging global macro conditions due to South Africa) but also lower than some underdeveloped
COVID-19 have negatively affected the domestic steel countries, such as Iran, Mexico and Argentina. Even if
industry as well, and resulted in demand pressures from end- India were to target reaching current levels of Iran’s per
user industries. The Ministry of Steel states demand declined capita steel consumption of ~223kg over the next 20
by ~17% YoY during April-December 2020. However, an years, it would have to achieve a consumption CAGR of
analysis of month-wise data shows domestic steel demand ~7%.
has bounced back strongly from the April lows, led by India has an ambitious target of reaching 300mn tonne
gradual unlocking and recovery in the economy. After capacity by FY31 under the National Steel Policy of 2017.
witnessing a sharp decline of ~86% YoY in April, the fall was Further, it envisages increasing steel consumption across
restricted to ~50% YoY in Q1FY21 and ~11% YoY in Q2FY21, end-user industries, such as infrastructure, autos and
and a decline of ~30% YoY for H1FY21. housing, which would lead to >2x jump in India’s per
capita steel consumption to ~158kg by FY31 from the
India demand CAGR at 3.1% in FY20-23E
current ~74kg, implying a consumption CAGR of ~8% up
We believe India’s steel industry is well placed to witness to FY31. However, this jump in per capita consumption
further recovery, driven by 1) government’s increased still would be lower than CY19’s global average per capita
spending on infra development and steel-intensive steel consumption of ~229mn tonne, providing adequate
segments, such as roads, railways & metro, 2) gradual growth opportunities for the domestic steel industry.
recovery in the auto industry, 3) continued thrust by the
government to use domestically manufactured iron & steel Exhibit 9: India’s per capita consumption around one-
products in government procurement, and 4) restrictions third of global average
on steel imports led by government measures, such as 1,200
implementation of anti-dumping duty & minimum import 1,000
(per capita steel kg)
price (MIP). Therefore, we expect domestic steel demand to 800

contract to ~11% YoY in FY21E but bounce back to ~14% 600
YoY and ~8% YoY in FY22E and FY23E, respectively,
400
implying a demand CAGR of 3.1% over FY20-23E.
200
Exhibit 8: Demand CAGR of 3.1% over FY20-23E 0
Iran
Ukraine
Brazil
Japan
Italy
Russia
Egypt
Taiwan
Spain
Mexico
India
China
Germany
Argentina
South Korea
Canada
World
United States
South Africa
Venezuela
120 20
100 15
10
(mn tonne)
80
5
(%)
60
0 Note: as on CY19, Source: World Steel Association, Elara Securities Research
40
(5)
20 (10)
0 (15)
FY18 FY19 FY20 FY21E FY22E FY23E
Demand YoY growth
Source: Steel.gov.in, Elara Securities Estimate

Ferrous Metals
Exhibit 10: India with the lowest per capita steel consumption among BRICS
1,400
1,200
(Per capita steel in KG)
South Korea
1,000
China
800 Taiwan
Japan
600
Italy
Germany
400
Ukraine Iran Russia United States
Canada
200 Egypt Mexico Spain
India Argentina
0 Brazil
South Africa
(200)
(10,000) 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
(Per capita GDP in USD at currunt price PPP)
Source: World Steel Association, Elara Securities Research
Construction, infra: govt’s strong push to lift demand

Exhibit 11: India’s 15-year demand CAGR at ~7%
16
The government’s strong impetus on affordable housing
14 and infrastructure projects over the past few years has
12 been key demand driver for the steel industry. As per
(% growth)
10 CRISIL, construction accounts for 35-40% of domestic steel

8
demand while infrastructure 25-30%. We believe
6
4 construction & infrastructure will continue to be key
2 demand drivers for domestic steel industry, given 1) the
0 government’s push for affordable housing under Pradhan
(2) Mantri Awas Yojana (PMAY), 2) higher rural housing
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
demand led by focus on rural development & good

Steel GDP Monsoon, 3) rapid urbanization, and 4) higher execution
of road & other large infrastructure projects.
Note: non-alloy apparent consumption over FY05-20, Source: CMIE, CRISIL,
Elara Securities Research
Exhibit 12: Around 50% steel demand to come from Housing for All
Consumption until FY19 Potential demand of entire
Projects Objective
(mn tonne) project (mn tonne)
Housing for All Focus on affordable housing in urban and rural area 15-17 50-60
Construction of 65,000km of road with total outlay of INR

Bharatmala 2 18-20
6.9tn
INR 8.5tn for port modernization through >577 projects
Sagarmala 1 13-15
during 2015-35
Investment of ~INR 3.5tn by FY24 to provide safe drinking
Jal Jeevan 0 11-13
water to all rural households
Udaan Development of 100 new airports over the next 20 years 1 7-9
INR 815bn planned construction capex in two freight

Freight Corridor 1-2 6-7
corridors of total 3,360km
Source: CRISIL, Elara Securities Research

Ferrous Metals
Green shoots visible in auto industry Exhibit 14: April-November 2020 capital spending by
The auto industry accounts for ~10% of domestic steel railways down ~2% YoY
demand. As per Society of Indian Auto Manufacturers 500
(SIAM), the domestic auto industry registered a sharp YoY 400
production decline of ~15% in FY20. Further,
(INR bn)
300
implementation of nationwide lockdown to control
COVID-19 resulted in sharp supply disruption, demand 200
pressures and temporarily shutdown of plants.
100
Consequently, production fell ~79% YoY in Q1FY21.
However, gradual recovery in the industry is visible with 0
easing of the lockdown, notably in two-wheelers and Apr 2017- Apr 2018- Apr 2019- Apr 2020-
Ferrous Metals
Nov 2017 Nov 2018 Nov 2019 Nov 2020
passenger vehicles segments where recovery has been
better-than-expected. Consequently, YoY production Source: CMIE, Elara Securities Research
decline in Q2FY21 was restricted to ~7% only and Consumer durables accounts for ~6% of steel demand.
Q3FY21 turned positive with ~16% YoY growth. Production of consumer durables products showed a
Elara Auto Analyst Jay Kale expects the fall in production sharp decline in April, due to the lockdown; however,
is likely to be ~15% YoY in FY21E, while he expected it to there has been a gradual recovery with easing of the
turn positive in FY22E with robust growth of ~29% YoY, lockdown and products like fans and washing machines
followed by ~22% YoY in FY23E, which should bolster are on a growth trajectory. This sector is consumer-
domestic steel demand recovery. dependent and is expected to grow with rising per capita
GDP, increasing disposable income and favorable
Exhibit 13: Auto production falls ~43% in H1FY21 population composition.
80
60 Elara Capital Goods & Consumer Durables Analyst Harshit
40 Kapadia expects the sector to post a flat trend in FY21E,
20
(%)
followed by ~36% YoY and ~19% YoY growth in FY22E

0
(20) and FY23E, respectively.
(40)
(60) Exhibit 15: Production of fans, water heaters and
(80) washing machines turns positive
(100)
300
Jul-14
Sep-08
Jun-10
Mar-12
Dec-13
Sep-15
Aug-11
Jun-17
Mar-19
Aug-18
Apr-09
Feb-15
Nov-09
Jan-11
Oct-12
May-13
Apr-16
Dec-20
Nov-16
Jan-18
Oct-19
May-20
200
100
(%)
Production Domestic sales Exports

0
Source: CMIE, Elara Securities Research
(100)
Recovery across end-user industries on the card
(200)
Mar-18
Jul-18
Jul-20
Sep-18
Mar-19
May-19
Jul-19
Sep-19
Mar-20
Sep-20
Jan-18
Jan-19
Jan-20
May-18
Nov-18
Nov-19
May-20
Nov-20
Apart from construction, infrastructure and autos;

railways, consumer durables and capital goods are some
other key end-user industries of steel and play an Washing & laundry machines
Fans
important role in demand growth. Capital spending by Electric water heaters
the Ministry of Railways has improved gradually over the Air - conditioners
Refrigerators
months and is merely down by ~2% YoY over April-
November 2020. The budgetary estimates for FY21 are Source: CMIE, Elara Securities Research
INR 700bn, which is ~3% higher than FY20’s actual spend. Capital goods accounts for ~15% of steel demand. IIP
We believe the government’s strong focus on reviving the Capital Goods Index reported a sharp decline of ~93% YoY
economy through improved execution of projects and in April when economic activities came to a standstill post
start of a busy construction period in the upcoming implementation of pan-India lockdown. However, it has
months augur well for higher spending by railways, recovered gradually and October turned positive with ~3%
leading to a rise in steel demand. Railways broadly YoY growth, resulting in a cumulative fall for the Index by
accounts for ~3% of domestic steel demand. National ~35% YoY over April-October 2020. We believe index
Infrastructure Pipeline envisages total spending on growth in the upcoming months will be better, given the
railways to be INR 13,675.63bn over FY20-25, thereby government push on infrastructure, opening of the mining
leading to a likely steel demand of 34mn tonne. sector and concessional tax rate for new manufacturing
firms will revive growth for the capital goods industry.

Ferrous Metals
Exhibit 16: IIP Capital Goods Index turns positive in Further, iron ore prices exceeded coking coal’s which has
October prompted port-based capacity in China to import semis
40 and process them further to save on increased iron ore
costs. Consequently, more than two-third of India’s semi-
20
finished exports were shipped to China over April-August
0 2020. Usually, during October-March, exports from China
(%)
(20)
fall in the global markets as it curtails production to curb
pollution. This is likely to act in favor of India.
(40)
Exhibit 17: Exports from China decline every Winter
(60)
8
(80)
7
(100)
(mn tonne)
Jul-17
Jul-18
Jul-19
Jul-20
Jan-17
Oct-17
Jan-18
Oct-18
Jan-19
Oct-19
Jan-20
Oct-20
Apr-17
Apr-18
Apr-19
Apr-20
6
Source: CMIE, Elara Securities Research 4
Buoyant exports emerges as savior during lockdown 3
Jul-17
Jul-18
Jul-19
Jul-20
Jan-17
Apr-17
Oct-17
Jan-18
Apr-18
Oct-18
Jan-19
Apr-19
Oct-19
Jan-20
Apr-20
Oct-20
Our analysis of H1FY21 performance of key domestic
steelmakers shows exports were a key driver of healthy
production and sales volume amid the lull in domestic
Source: Bloomberg, Elara Securities Research
demand. June saw a jump of ~400% YoY in exports and
exports of several large steelmakers were 50-80% of total Strong exports to restrict fall in production
production in Q1FY21. However, revival in economic We expect a fall in domestic steel demand by ~11% YoY
activities post the gradual easing of domestic lockdown in FY21E, but the decline in production to be lower on the
has led to improvement in domestic demand; thus, back of strong exports. India’s finished steel exports grew
exports contribution in overall sales for steelmakers has ~29% YoY to ~8.2mn tonne while imports declined ~15%
come off gradually during the past few months. YoY to ~6.7mn, making India a net exporter of finished
As per Ministry of Steel, India exported 7.7mn tonne of steel during FY20. November 2020 data of Ministry of
finished steel, up ~34% YoY, while imports stood at 2.7mn Steel suggests India has been net exporter of finished steel
tonne, down ~47% YoY, during April-November 2020. during April-November 2020 with net trade surplus of
Simultaneously, as per CRISIL, exports of semi-finished 5mn tonne. Therefore, we believe India will remain a net
products (semis) stood at 5.7mn tonne, 3.5x YoY, over exporter of finished steel in FY21 as well.
April-November 2020. We expect finished steel export for FY21E to be ~9mn
Weak domestic demand and lower domestic iron ore tonne while imports would be restricted to ~5mn tonne.
prices than global have led to an increase in cost We expect export of semis for FY21E to be slightly higher
competency of India’s steelmakers, resulting in higher than 6mn tonne vs a mere 2.8mn tonne in FY20.
exports during H1FY21. As per SteelMint, China, the Therefore, we expect exports (finished steel & semis) in
largest steel producer, imports more than 90% of its iron FY21E to be ~4mn tonne higher than in FY20 while
ore requirement. While global steel prices fell from end- domestic demand to decline ~11mn tonne YoY. Thus, a
February until June, iron ore prices strengthened, led by dip of ~7% YoY in domestic crude steel production is likely
supply-side disruptions, especially in Brazil and Australia. to be ~8mn tonne.

Ferrous Metals
India capacity to rise 25mn tonne by FY25E Exhibit 18: India steel capacity CAGR of 3.4% over
FY20-25E
India steel capacity registered a CAGR of ~5% from
Steelmakers (mn tonne) FY20 FY25E
~110mn tonne in FY15 to ~139mn tonne in FY20. We
expect FY21 to be another lull year post muted capacity SAIL 18.6 21.4
addition over FY18-20, due to COVID-19 induced Tata Steel 19.6 24.6
economic slowdown. However, beyond FY21, some JSW Steel 18.0 29.0
capacity is likely to come on-stream, such as: 1) 5mn-tonne Jindal Steel & Power (JSPL) 8.6 8.6
capacity expansion by Tata Steel at Kalinganagar Rashtriya Ispat Nigam (RINL) 7.3 7.3
(Odisha), 2) JSW Steel’s Dolvi (Maharashtra) plant NMDC 0.0 3.0
expansion of 5.0mn tonne along with Vijayanagar Others 66.9 70.4
(Karnataka) plant expansion of 6mn tonne, 3) 3mn-tonne
Ferrous Metals
Total 139.0 164.3
Greenfield project by NMDC at Nagarnar, (Chhattisgarh),
Source: CRISIL, Company, Elara Securities Estimate
4) SAIL expansion of 2.8mn tonne, and 5) 1.0mn-tonne
expansion by Vedanta at Electrosteel. Accordingly, we Domestic utilization at ~80% in FY23E
expect capacity to rise from ~139mn tonne in FY20 to
Given the likely decline in crude steel production by ~7%
~152mn tonne by FY23E and ~164mn tonne by FY25E.
YoY in FY21E, due to weak domestic demand in Q1,
Apart from this, the government has an ambitious target
utilization is expected to fall from ~78% in FY20 to ~71%
of reaching 300mn tonne capacity by FY31 under the
in FY21E. However, it is likely to recover to ~74% in FY22E
National Steel Policy of 2017, which is likely to support
and improve further to ~80% in FY23E on the back of
regular capacity addition in the long run.
strong demand recovery. We believe large steelmakers
with integrated capacity are expected to operate at a
higher rate than the industry.
Exhibit 19: Utilization is likely to reach ~80% in FY23E

Crude steel (mn tonne) FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Capacity 128 138 138 139 142 151 152
Production 98 103 111 109 101 111 122
Capacity Utilization (%) 76 75 80 78 71 74 80
Source: CRISIL, Elara Securities Estimate

Ferrous Metals
Attractive proposition
 Supply constraints to keep global iron ore prices elevated
 Delay in restarting auctioned iron ore mines likely to keep domestic supply tight
 Steel prices to remain firm
Global iron ore prices likely to remain firm Exhibit 21: Australia accounts for ~54% of world’s iron
Iron ore prices, which started to surge in June 2020, ore trade
remain firm at higher levels for the past few months,
primarily on the back of production constraints in Brazil ROW
and strong demand from China. According to SteelMint, 24%
China, the largest iron ore importer and consumer
globally, imported 1.17bn in CY20, registering a growth
of ~9% YoY. On the other hand, supply of iron ore was hit
Australia
in the first half of CY20, due to rising COVID-19 cases and 54%
Vale’s Brumadinho dam disaster in Brazil in CY19 (BHP,
Vale and Rio Tinto are three major iron ore producers of Brazil
22%
world). While BHP and Rio Tinto are likely to achieve
production guidance in CY20, Vale, in its press release of
2 December, has lowered iron ore production guidance Note: as on CY19. Source: Government of Australia’s resource and energy
to 300-305mn tonne from 310-330mn tonne. quarterly publication
Improving economy, demand to sustain pricing trend Production ramp-up in Odisha key monitorable
As per SteelMint, current global iron ore prices are As per SteelMint, during FY20, India’s iron ore production
hovering ~USD 170 per tonne, higher by ~78% YoY. We jumped ~19% YoY to ~245mn tonne while Odisha’s iron
expect iron ore prices to be firm in the near term on the ore production grew ~30% YoY to ~145mn tonne. This
back of continued supply constraints. Simultaneously, strong surge in Odisha’s production occurred as mining
likely improvement in the global economy and rise in steel leases of several iron ore mines in the state were about to
demand augur well for sustainable pricing trend. Australia end, and, thus, owners ramped up production to extract
is the largest exporter of iron ore globally, accounting for the most amount of iron ore. In Q4FY20, 19 iron ore mines
~54% of global iron ore exports in CY19 (Source: in Odisha were auctioned under the new mining policy.
government of Australia). Australia in its December These mines had production capacity of 86mn tonne
resources and energy quarterly publication expects iron (~35% of India merchant iron ore production) while
ore prices to remain well above USD100 per tonne until actual production was 55.5mn tonne and 71mn tonne in
mid-CY21 before easing to USD 75 per tonne by end- FY19 and FY20, respectively. Auction fetched weighted
CY22. average premium of ~117%. While the highest bid was at
150% premium lowest bid stood at 90% premium.
Exhibit 20: China iron ore imports expected to increase ~11% in CY21
(mn tonne) Annual chg (%)
CY19 CY20 CY21 CY22 CY20 CY21 CY22
Total world trade 1,555 1,647 1,783 1,861 6.0 8.2 4.4
Iron ore imports
China 1,071 1,209 1,343 1,421 13.0 11.0 5.8
European Union 27 137 128 125 125 (7.0) (2.2) 0.0
Japan 120 98 101 100 (18.3) 3.2 (1.0)
South Korea 74 69 74 75 (6.4) 7.1 1.3
India 5 5 5 5 (6.5) (2.1) 0.0
Iron ore exports
Australia 836 876 896 923 4.9 2.3 3.0
Brazil 336 269 281 301 (20.1) 4.5 7.1
Ukraine 44 50 62 64 12.9 24.0 3.2
India 40 52 62 65 28.2 21.3 3.6
Source: Government of Australia’s resource and energy quarterly publication, Elara Securities Research

Ferrous Metals
Delay in restarting mines to hit supply Exhibit 24: Odisha accounts for ~90% of incremental
production
Considering mandatory 80% production from auctioned
40 30
mines with respect to production recorded in the past
30 20
couple of years, target production from these mines was 18
20
28.7mn tonne over April-October 2020. However, as per 10 2 1
(%)
SteelMint, actual production was a mere 6.51mn tonne 0
during the same period. (10)
(20)
As on now, only 11 out of 19 mines auctioned in Odisha (30) (20)
Others
Jharkhand
Odisha
All India
Chhattishgarh
Karnataka
have been able to commence production, and their ramp-
up is expected to be gradual. Apart from COVID-19
Ferrous Metals
related disruptions, one key reason for lack of interest in
kickstarting operations could be significantly higher
premiums that new lessees quoted during the auctions.
Note: as on FY20, Source: SteelMint, Elara Securities Research
As per SteelMint, due to lower production from auctioned
mines, April- December 2020 overall iron ore production Tale of two coals: coking and non-coking
of Odisha was down 30% YoY to 72mn tonne. NMDC has As per Australia’s December resources and energy
been able to raise prices by ~115% for lumps and ~104% quarterly publication, the country is the largest exporter
for fines over April-January 2021 on the back of supply of coking coal accounting for ~55% global coking coal
constraints. Given firm global iron ore prices, gradual exports. It exported 184mn tonne in CY19. On the other
recovery in domestic steel demand and delay in starting hand, China is the largest buyer of coking coal and
of recently auctioned iron ore mines in Odisha, we believe imported 75mn tonne in CY19. If we analyze these latest
domestic iron ore prices will remain firm. developments, China’s customs department suggests it
Exhibit 22: Iron ore prices increase sharply during the imported 220.8mn tonne of coal & lignite (including
past few months coking coal) in the first eight months of CY20 and ~30%
of the coal & lignite imported was from Australia. In case
6,300
5,800 of coking coal, Australia’s share stood at ~60% (31.6mn
5,300 tonne). However, restrictions imposed by China on coal
(INR /tonne)
4,800 imports from Australia since mid-October have resulted in

4,300
3,800
oversupply of Australian coal in the international market.
3,300 Current Australian coking coal prices are hovering at USD
2,800 100 per tonne vs end-September peak of USD 139 per
2,300
tonne. We believe the absence of procurement from
1,800
China will continue to keep prices of Australian coking
Jul-18
Oct-18
Jul-19
Jul-20
Jan-18
Jan-19
Oct-19
Jan-20
Oct-20
Jan-21
Apr-18
Apr-19
Apr-20
coal under pressure in the near term.

Lump ore Fines While coking coal has been on a declining trend, non-
Note: NMDC iron ore prices. Source: Company, Elara Securities Research coking coal prices have shot up ~35% to ~USD 90 per
tonne in the past two months. This sharp rise in coal prices
Exhibit 23: Odisha accounts for ~59% of iron ore
is attributed to: 1) small miners going bankrupt due to
production
unavailability of funds, 2) key miners cutting supplies in
Others
Jharkhand 4% South Africa to support prices, 3) expectations of Japan’s
11% power utilities to raise dependence on thermal coal as its
main energy source over January-February 2021, as LNG
Karnataka
prices surged from USD 2 per mmbtu in June to USD 15.7
12% (Jan’21 average) per mmbtu, up 238% YoY, 4) restocking
needs for Winter from Taiwan for high calorific value
Odisha thermal coal, and 5) concerns of a level-4 lockdown to be
59% implemented in South Africa amid a major outbreak and
Chhattishgarh
14% sharp rise in COVID-19 cases. We expect non-coking coal
prices to remain firm for the near term as Richards Bay
Terminal has been shut for maintenance for 15 days in
Note: as on FY20, Source: SteelMint, Elara Securities Research January 2021.

Ferrous Metals
Exhibit 25: India's coking coal imports likely to increase at a CAGR of ~4% over CY19-22
(mn tonne) Annual chg (%)
CY19 CY20 CY21 CY22 CY20 CY21 CY22
Total world trade 337 294 328 348 (12.1) 10.8 7.2
Imports
China 75 75 67 73 0.7 (10.9) 8.2
India 58 55 60 65 (5.4) 9.8 8.7
Japan 47 40 40 40 (13.5) 0.5 (0.8)
European Union 28 41 35 39 38 (14.0) 11.5 (2.6)
South Korea 37 34 38 38 (6.4) 10.1 1.1
Exports
Australia 184 168 179 185 (9.1) 6.7 3.5
United States 50 37 42 44 (26.5) 14.3 4.8
Canada 34 32 34 35 (6.5) 5.9 2.9
Russia 25 22 24 27 (9.0) 7.4 12.5
Mongolia 30 24 30 35 (20.2) 25.4 16.7
Mozambique 5 3 5 7 (39.3) 68.3 40.0
Source: Government of Australia’s resource and energy quarterly publication, Elara Securities Research
Exhibit 26: Australia with lion’s share in world’s prices will remain firm at higher levels in the near term,
coking coal trade supported by 1) lower supply from steelmakers, 2)
improving domestic demand scenario with strong
RoW demand coming from autos and consumer durables
20%
sectors, 3) limited inventory with steelmakers, and 4)
continued healthy exports, aided by favourable global
steel prices.
Canada
10% Australia China's steelmaker Baosteel has released flat steel product
55% list prices for February 2021 delivery, in which the list price
for HRC has been hiked by RMB 350 per tonne (USD 54).
USA Further, production restrictions on Winter cuts and
15% continued robust demand from downstream industries
are keeping demand elevated. We believe this increase in
Note: as on CY19, Source: Government of Australia’s resource and energy prices by China will lead to further increase in steel prices
quarterly publication, Elara Securities Research
by other steelmakers as well.
Steel price to remain firm In case of a downcycle, we believe government of India’s
India’s steel prices softened ~12-14% during FY20 on anti-dumping duty on HRC steel imports will restrain any
account of weak global prices and sluggish domestic sharp and unfavorable fall in prices. If we analyze past
demand. While domestic prices had started to soften since measures, India had imposed an anti-dumping duty on
mid-FY20, some recovery was witnessed in Q4FY20, but it HRC steel imports in CY16 setting a minimum price
dropped again due to COVID-19 pandemic and reached threshold of USD 478-489 per tonne for imports from
a low of ~INR 36,000 tonne in June 2020. However, countries, including China, South Korea, Russia and
demand recovery in China and favorable global steel Japan. While at the current levels of global steel prices,
prices have fueled strong rebound in India’s steel prices in anti-dumping duty does not have much significance, in
recent months. HRC (Mumbai) prices have increased by our view, it provides downside protection from imports in
INR 10,375 per tonne in the past three months and the event of a sharp fall in global prices. The duty was put
current prices are around INR 57,000 per tonne. Full in place for five years and will expire in August 2021, but
benefits of a price hike are likely to get reflected in the P&L it is highly likely to get extended especially, in the current
of steel firms in H1CY21. geopolitical backdrop.
If we compare domestic prices with the price of landed
imports from China, domestic steel prices currently are
available at a ~3% discount. We believe domestic steel

Ferrous Metals
Exhibit 27: Cost pressures and improving demand to support prices locally and globally
60,000 Strong uptick in steel demand and High global prices

55,000 elevated coking coal prices and iron ore prices
50,000
(INR/tonne)
45,000
40,000
35,000 High global prices, currency
30,000 depreciation and high iron
25,000 ore prices
20,000
Jul-15
Mar-17
Jul-20
Aug-17
Sep-19
Jan-18
Jun-18
Apr-19
Feb-20
Dec-15
Oct-16
Nov-18
Dec-20
May-16
Ferrous Metals
Domestic Prices Landed cost-FOB China
Source: CRISIL, Elara Securities Research
Exhibit 28: Finished steel inventory at two-year lows
16,000
('000 tonne)
14,000
12,000
10,000
8,000
6,000
Mar-19
Jul-19
Sep-19
Mar-20
Jul-20
Jan-19
Jan-20
Sep-20
May-19
Nov-19
May-20
Nov-20
Closing stock
Source: CMIE, Elara Securities Research

Ferrous Metals
Early economy cycle play

 Doublers: steel stocks offer >2x returns during economic recovery
 Valuations exceed 2x P/B during periods of economic recovery
 Favorable macros: Tata Steel is our top pick in the ferrous metals space
2x returns during economic recovery Similarly, post the economic slowdown after the World
Trade Center attacks in CY01 and the dotcom busts, Mcap
Our analysis of the market cap (Mcap) of steel companies
of steel stocks had posted a CAGR of ~96% over CY02-05,
(SAIL+JSW+Tata Steel) reveals stocks have given huge
offering returns of ~89% over the broader market during
returns during the period of economy recovery. Post the
the same period.
Lehman crisis, steel stocks had returned ~210% in a
period of a year. During the same period, CMIE Steel Index Valuations exceed 2.0x P/BV
had given excess returns of ~139% over the NIFTY 50
During periods of economy recovery, steel stocks traded at >2x
(Nifty 50 returns ~75%)
P/BV. Currently, steel stocks are trading at 1.4x FY20 P/BV.
Exhibit 29: Steel stock more than triple during past economic recoveries
Post WTC slowdown, Post Lehman crash Mcap

1 year returns: 214% increase by 2.1x in a year
2,000 5
1,600 4
1,200 3
800 2
(INR mn)
(%)
400 1
0 0
(400) (1)
(800) (2)
CY99
CY16
CY96
CY97
CY98
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY17
CY18
CY19
Mcap Wold GDP growth
Source: IMF, CMIE, Elara Securities Research
Exhibit 30: Post an economic slowdown, steel stocks outperform the market
250 5
(% excess retuns vs nifty)
200 4
150 3
100 2
(%)
50 1
0 0
(50) (1)
(100) (2)
FY01
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Excess total returns over NIFTY World GDP growth
Exhibit 31: Stocks trade at >2.0x P/BV during economy recovery pace
3.0 5
2.5 4
3
2.0
(x)
2
(%)
1.5
1
1.0
0
0.5 (1)
0.0 (2)
CY01
CY14
CY96
CY97
CY98
CY99
CY00
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY15
CY16
CY17
CY18
CY19
Averge P/BV Wold GDP growth (RHS)

Ferrous Metals
Key risks Macro favorable for integrated firms

Slowdown in demand in China With current iron ore (NMDC iron ore fines at INR 4,810
Hebei, province in North China, has emerged as the new per tonne vs FY20 average of INR 2,700 per tonne) and
epicenter of the COVID-19 outbreak in China. The domestic steel prices hovering around all-time highs (HRC
Chinese government has curtailed the mobility of the Mumbai price at INR 57,000 per tonne vs FY20 average of
citizens in three of its cities, namely Shijianzhuang, Xingtai ~INR 38,000), we believe firms with captive iron ore mines
& Langfang, and all three have been labeled as “high or are well placed vs peers. This is because as their margin is
medium risk”. Accordingly, all public transportation across likely to strengthen further and they are unlikely to face
provinces and cities inside Hebei, including flights and production constraints on lower availability of iron ore.
highways, has been suspended. Further, several Thus, Tata Steel is our preferred pick in the ferrous metal
space. Tata Steel’s landed iron ore cost is only ~USD 25
Ferrous Metals
construction sites in Hebei have been stopped currently,
which include Xiong’an New Area, a new economic per tonne vs ~USD 170 for Chinese steelmakers and >USD
development zone as a model for China’s future city 79 per tonne for other domestic steelmakers, providing
development. If COVID-19 spreads to other parts of China, margin advantage. Further, Tata Steel’s focus on
it could slow steel demand. deleveraging and exiting non-core weak businesses
augurs well.
Government interference on pricing
JSPL is likely to be one of the key beneficiaries of
Any interference by the government of India to control
government’s strong impetus on infrastructure
prices may have negative impact on future pricing trend.
development given its higher exposure to long products.
Federation of Indian Mineral Industries (FIMI) and Indian
Simultaneously, the company’s concerted efforts toward
Steel Association (ISA) have been scuffling over price hikes
faster deleveraging augur well.
while the Ministry of Road Transport and Highways has
been upset about the sharp rise in prices over the past six In terms of JSW Steel, the completion of ongoing 5mn
months, due to likely rise in government infra project cost. tonne capacity expansion, focus on backward integration
and lower cost structure is likely to support future
Strict laws to contain climate change
earnings. However, we believe current valuation already
With rising awareness about climate change and partly factors in these positives, it is reflected by its
countries across world pledging to reduce carbon premium vs peers. For SAIL, its access to captive iron ore
footprints, the steel industry may face stricter and mines and its approval to sell surplus iron ore in the market
unfavorable compliance hurdles, resulting in pressure on are key positives; however, high cost structure vs peers is
operations and profitability of steelmakers. a key drag.
Thus, we are structurally positive on the ferrous metal
space on the back of 1) recovery in world economy
bolstering steel demand post a challenging CY20, 2)
healthy demand uptick in India led by the government’s
strong impetus on infrastructure development and
gradual recovery in other end-user industries, 3) firm steel
prices, and, 4) lower levels of Inventory in the channel. We
initiate with a Buy rating on Tata Steel & JSPL and
Accumulate on JSW Steel and SAIL.

Ferrous Metals
Exhibit 32: Valuation charts

JSW: five-year average EV/EBITDA stands at 6.7x JSPL: five-year average EV/EBITDA stands at 6.8x
15 20
15
10
10
(x)
(x)
5
5
0 0
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
EV/EBITDA (x) Average +1SD EV/EBITDA (x) Average +1SD
-1SD +2SD -2SD -1SD +2SD -2SD
Source: Bloomberg, Company, Elara Securities Estimate Source: Bloomberg, Company, Elara Securities Estimate
Tata Steel: five-year average EV/EBITDA stands at 6.0x SAIL: five-year average P/BV stands at 0.6x
15 5
4
10 3
2
(x)
(x)
5 1
0
0 (1)
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
EV/EBITDA (x) Average +1SD P/BV Average +1SD
-1SD +2SD -2SD -1SD +2SD -2SD
Source: Bloomberg, Company, Elara Securities Estimate Source: Bloomberg, Company, Elara Securities Estimate

Initiating Coverage
JSW Steel
Volume to take lead Rating: Accumulate
Getting the timing right: 28% domestic capacity expansion by FY21 Target Price: INR 443
Upside: 16%
JSW Steel (JSTL IN) is expanding domestic steel capacity from the
CMP: INR 383 (as on 18 January 2021)
current 18mn tonne to 23mn tonne through expansion of its
Maharashtra-based Dolvi plant by 5mn tonne to 10mn tonne by end- Key data
FY21. We believe the company has rightly timed its capacity expansion Bloomberg /Reuters Code JSTL IN/JSTL.BO
and this should enable JSTL to gain market share and seize growth Current /Dil Shares O/S (mn) 2,417/2,417
opportunities arising from the expected uptick in domestic demand. We Mkt Cap (INR bn/USD mn) 926/12,637
expect a volume CAGR of ~9% over FY20-23E. Daily Volume (3M NSE Avg) 7,687,974
Face Value (INR) 1
Relying on backward integration: prioritizing raw material security 1 US$= INR 73.3
JSTL had won six iron ore mines in Karnataka via auctions in CY16 and Note: pricing as on 18 January 2021; Source: Bloomberg
CY18. Further, it also won four iron ore mines in Odisha with reserves
Price & Volume
of ~1.1bn tonne and three new ones in Karnataka in FY20.
Consequently, iron ore requirement being met through captive mines 500 40
has improved from ~4% in FY19 to ~15% in FY20 and further to ~27% 400 30
in Q2FY21. The company targets meeting 50-60% of its iron ore 300
20
requirement by end-FY21. We believe improvement in raw material 200
10
security will ensure uninterrupted production for the company without 100
being concerned about limited availability of iron ore. 0 0
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
Diversifying mix: varied revenue stream to reduce risk of slowdown Vol. in mn (RHS) JSW Steel (LHS)
As per company, JSTL is one of the largest steel exporters in India. In Source: Bloomberg
FY20, ~21% of volume came in from exports. Exports contributed ~57% Shareholding (%) Q4FY20 Q1FY21 Q2FY21 Q3FY21
in Q1FY21 and ~28% in Q2FY21. Its presence in the exports markets has Promoter 42.7 43.1 44.1 44.1
partly insulated it from weak domestic demand in H1FY21. While Institutional Investor 21.5 20.3 19.2 19.6
domestic demand fell ~30% YoY in H1FY21, its sales volume was down Other Investor 27.7 28.1 28.2 28.1
only ~6% YoY. JSTL accounted for ~25% of total steel exported by India General Public 8.1 8.5 8.5 8.2
in H1FY21. The company’s performance shows an ability to realign its Source: BSE
sales efforts as per market conditions. Apart from this, JSTL is well Price performance (%) 3M 6M 12M
positioned to cater to a wide range of industries, led by its diversified Sensex 21.5 31.2 15.8
JSW Steel 23.2 85.3 40.1
product basket. Thus, volume is unlikely to get hit by a slowdown in Tata Steel 69.3 90.0 34.6
single end-user industry. Jindal Steel 45.8 59.8 59.6
SAIL 94.8 86.3 29.4
Source: Bloomberg
Valuation
In the next two years, we believe JSTL will be able to grow above
200
industry growth due to its timely capacity addition. Its US and Europe
Rebased to 100
operations, which were drag to overall profitability, are likely to 150
turnaround in FY22. Increase in backward integration is also 100

expected to reduce production loss due to iron ore shortage. While
50
the company’s fundamentals are improving, current valuations are
partly factoring it in. The stock is trading at ~39% premium to peers. 0
Thus, we initiate on JSW Steel with an Accumulate rating and a TP of JSW Steel Sensex
INR 443 based on 7x FY23E EV/EBITDA. Source: Bloomberg
Key Financials
YE Revenue YoY EBITDA EBITDA Adj PAT YoY Fully DEPS RoE RoCE P/BV EV/EBITDA
March (INR mn) (%) (INR mn) margin (%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY20 711,160 (13.8) 118,730 16.7 45,935 (39.9) 19.1 12.9 8.5 2.6 11.6
FY21E 751,260 5.6 176,372 23.5 62,855 36.8 26.2 15.9 12.0 2.3 8.0
FY22E 885,889 17.9 204,721 23.1 79,511 26.5 33.1 17.4 13.4 2.0 6.9
FY23E 959,207 8.3 223,000 23.2 91,501 15.1 38.1 17.2 14.0 1.7 6.3

JSW Steel
Valuation trigger Investment summary

Ramp-up of upcoming International  Completion of ongoing capacity
capacity in Dolvi (Maharashtra) businesses coming expansion at Dolvi (Maharashtra) to
to strong utilization levels back into the green
ensure sustainable volume growth in
500 the upcoming years
2 3
400 1
 Securing iron ore mines in the past two
300 Able to offset high years has strengthened backward
200 acquisition cost of
Odisha mines by cost integration, providing raw material
100 savings initiatives security
0
 Diversified product basket and strong
Jul-21
Jul-20
May-20
May-21
Sep-20
Sep-21
Jan-20
Jan-22
Nov-20
Jan-21
Nov-21
Mar-21
Mar-20
exports portfolio to offset any

unwarranted market conditions
Source: Bloomberg, Elara Securities Estimate
EV/EBITDA valuation overview

Valuation trigger
(INR mn) FY23E
EV/EBITDA based valuation 1. Ramp-up of upcoming capacity in
EBITDA 2,23,000 Dolvi (Maharashtra) to strong
Target multiple (x) 7.0 utilization levels
Target EV 15,61,002 2. International businesses coming back
Less: net debt 4,97,048 into the green
Target Market cap 10,63,954
No. of shares (mn) 2,400
3. Able to offset high acquisition cost of
TP (INR) 443
Odisha mines by cost savings initiatives
CMP (INR) 383
Upside (%) 15.7 Key risks
Note: pricing as on 18 January 2021; Source: Elara Securities Estimate
 Demand slowdown in the domestic
Valuation: five-year average EV/EBITDA stands at 6.7x markets from key end-user industries
14 coupled with unfavorable steel prices
12 may be a drag on margin
10
8
 Below-than-expected utilization level
(x)
6 of upcoming capacity
4
2
0
Our assumptions
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
 Volume CAGR of ~9% over

FY20-23E
EV/EBITDA (x) Average +1SD
-1SD +2SD -2SD
 EBITDA per tonne CAGR of ~11% over
FY20-23E
Source: Bloomberg, Company, Elara Securities Estimate
 Margin expansion of ~700bp over
EBITDA per tonne CAGR of ~11% over FY20-23E
FY20-23E
14,000
12,000
10,000
(INR)
8,000
6,000
4,000
2,000
0
FY20 FY21E FY22E FY23E
Source: Company, Elara Securities Estimate

JSW Steel
Consolidated Financials (YE March)

Income Statement (INR mn) FY20 FY21E FY22E FY23E Revenue & margin growth trend
Net Revenue 711,160 751,260 885,889 959,207
23.5 23.1 23.2
Operating profit 96,630 160,200 185,557 202,549 1,020 24
Add:- Other operating Income 22,100 16,172 19,164 20,451
820 22
(INR bn)
EBITDA 118,730 176,372 204,721 223,000
Less :- Depreciation & Amortization 42,460 54,969 60,204 64,079 620 20
(%)
Add: Other income 5,460 5,573 5,800 5,964 420 16.7 18
EBIT 81,730 126,976 150,317 164,886
Less:- Interest Expenses 42,650 38,469 37,415 35,455 220 16
Add/Less: - Extra-ordinaries (8,950) (300) (900) (300) 20 14
PBT 30,130 88,207 112,002 129,130 FY20 FY21E FY22E FY23E
Less :- Taxes (9,060) 26,462 33,601 38,739
Ferrous Metals
Net Revenue EBITDA Margin
Reported PAT 39,190 61,745 78,401 90,391
Minority Interest/share of Source: Company, Elara Securities Estimate
1,110 1,110 1,110 1,110
profits of JV & associate
Reported PAT after Minority Interest 40,300 62,855 79,511 91,501
Adjusted PAT 45,935 62,855 79,511 91,501
Balance Sheet (INR mn) FY20 FY21E FY22E FY23E
Adjusted profit growth trend
Share Capital 3,010 3,010 3,010 3,010 120 80
Reserves & others 362,980 419,845 488,647 569,438
90 60
Minority Interest (5,750) (6,860) (7,970) (9,080) 36.8
(INR bn)
60 26.5 40
Borrowings 593,730 597,230 588,230 581,230 15.1
Deferred Tax (Net) 16,770 17,823 17,251 16,712
(%)
30 20
Other liabilities 57,580 59,278 56,704 54,308 0 0
Total Liabilities 1,028,320 1,090,325 1,145,871 1,215,618
(30) (39.9) (20)
Gross Block 806,220 1,080,220 1,175,220 1,230,220
Less:- Accumulated Depreciation 187,090 242,059 302,263 366,342 (60) (40)
Net Block 619,130 838,161 872,957 863,878 FY20 FY21E FY22E FY23E
Add:- Capital work in progress 268,570 90,570 101,570 163,570 Adjusted PAT Adj. PAT Growth
Goodwill 4,150 4,150 4,150 4,150
Non-current investments 12,570 12,570 12,570 12,570
Net Working Capital (44,240) (4,235) 16,363 30,865
Cash & current investments 120,050 100,579 83,760 84,182
Other assets 48,090 48,531 54,502 56,403 Return ratios
Total Assets 1,028,320 1,090,325 1,145,871 1,215,618
20 15.9 17.4 17.2
Cash Flow Statement (INR mn) FY20 FY21E FY22E FY23E
12.9
Cash profit adjusted for non-cash items 96,670 150,663 169,649 183,422 15
Add/Less : Working Capital Changes 71,820 (40,005) (20,598) (14,502)
10 13.4 14.0
(%)
Operating Cash Flow 168,490 110,657 149,051 168,920 12.0

Less:- Capex (193,230) (96,000) (106,000) (117,000) 5 8.5
Free Cash Flow (24,740) 14,657 43,051 51,920
Financing Cash Flow 69,040 (39,261) (59,699) (55,560) 0
Investing Cash Flow 13,860 5,132 (171) 4,063 FY20 FY21E FY22E FY23E
Net change in Cash 58,160 (19,471) (16,819) 422
ROE ROCE
Ratio Analysis FY20 FY21E FY22E FY23E
Income Statement Ratios (%) Source: Company, Elara Securities Estimate
Revenue Growth (13.8) 5.6 17.9 8.3
EBITDA Growth (37.4) 48.5 16.1 8.9
Adj. PAT Growth (39.9) 36.8 26.5 15.1
EBITDA Margin 16.7 23.5 23.1 23.2
Adj. Net Margin 6.5 8.4 9.0 9.5
Return & Liquidity Ratios (%)
Net Debt/Equity (x) 1.3 1.2 1.0 0.9
ROE 12.9 15.9 17.4 17.2
ROCE 8.5 12.0 13.4 14.0
Per Share data & Valuation Ratios
Adjusted EPS (INR) 19.1 26.2 33.1 38.1
EPS Growth (%) (39.9) 36.8 26.5 15.1
DPS (INR) 2.0 4.0 4.0 4.0
P/E Ratio (x) 20.0 14.6 11.6 10.0
EV/EBITDA (x) 11.6 8.0 6.9 6.3
EV/Sales (x) 1.9 1.9 1.6 1.5
P/BV(x) 2.6 2.3 2.0 1.7
Dividend Yield (%) 0.5 1.0 1.0 1.0

JSW Steel
Company Description
JSW Steel (JSTL IN), part of the JSW Group, started operations with a single unit in 1982. Today, it is one of India’s
largest steelmakers, with an installed capacity of 18mn tonne. Its plant at Vijayanagar, Karnataka, is the largest single
location steel plant in India with capacity of 12mn tonne. Apart from this, it has plants at Dolvi (Maharashtra) of 5mn
tonne and Salem (Tamil Nadu) of 1mn tonne. Its captive power capacity stands at 921MW as on FY20. Further, its
100% subsidiary JSW Steel Coated Products is a leading coated steelmaker with capacity of 1.8mn tonne. JTSL has an
ambitious target of scaling up its steelmaking capacity to 45mn tonne in the long run. Its overseas manufacturing
operations comprise a plate & pipe mill at Baytown, Texas (US), a steelmaking facility at Ohio (US) and a long products
rolling facility in Italy. The company also owns mining assets in Chile, the US & Mozambique and at Karnataka &
Odisha in India.
Board of Directors & Management Dr Vinod Nowal, Deputy Managing Director

Sajjan Jindal, Chairman & Managing Director Dr Vinod Nowal was appointed as Director (Commercial)
Sajjan Jindal is the principal promoter of JSW Steel. Apart in April 2007 and redesignated as Director & Chief
from steel, under his leadership, the JSW Group over the Executive Officer in April 2009. He was subsequently
years has expanded its presence in other sectors, such as redesignated as Deputy Managing Director of JSW Steel
power, infrastructure building and cement. He serves as in May 2013. He has been associated with the Group
Council Member of the Indian Institute of Metals and is since 1984 and served in various positions. He currently
also a Member of the Executive Committee and Chairman serves as President of Karnataka Iron and Steel
of the Sustainability Committee of World Steel Association, Manufacturers’ Association. He has an MBA and holds
as well as the Former President of Institute of Steel Doctorate in Inventory Management. He also has
Development and Growth. He has a degree in Mechanical attended an Advanced Management Program from
Engineering from Bangalore University. Harvard Business School, Boston, US.
Seshagiri Rao MVS, Joint MD & Group CFO Jayant Acharya, Director (Commercial & Marketing)
Seshagiri Rao MVS joined the JSW Group in 1997 as Chief Jayant Acharya has two decades of experience in the steel
Financial Officer. He is responsible for overall operations industry. He was appointed as Director (Sales &
of JSW Steel, including strategy formulations related to Marketing) in May 2009 and redesignated as Director
business development, expansion of existing businesses, (Commercial & Marketing) in April 2010. He is also Co-
joint ventures, mergers & acquisitions and cost Chair of the Committee on steel & Non-Ferrous Metals for
management. He has three decades of experience in the Federation of Indian Chamber of Commerce and Industry.
steel industry, corporate finance and banking. Prior to He has a degree in Chemical Engineering and a master’s
joining JSTL, he was associated with several well-known degree in Physics from Birla Institute of Technology &
corporate. He is a Member of the Institute of Cost and Science, Pilani. He completed his MBA from Indore
Works Accountants of India and a Licentiate Member of University.
the Institute of Company Secretaries of India. He is also a
Certified Associate of the Indian Institute of Bankers and a
diploma holder in Business Finance awarded by the
Institute of Chartered Financial Analysts of India.

JSW Steel
Coverage History
450
400 1
350
300
250
Ferrous Metals
200
150
100
Jul-20
Mar-20
Jan-20
Feb-20
Apr-20
Jun-20
Sep-20
Aug-20
Oct-20
Nov-20
Jan-21
Dec-20
May-20
Not Covered Covered
Date Rating Target Price Closing Price

1 18-Jan-2021 Accumulate INR 443 INR 383
Guide to Research Rating

BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%

JSW Steel
Notes

Initiating Coverage
Tata Steel
Sweet spot Rating: Buy
Domestic resurgence: India operations to outperform peers Target Price: INR 860
Upside: 29%
Higher iron ore prices and its reduced supply in the domestic market after
the inability of recently auctioned (during Q4FY20) Odisha-based iron ore
mines to start production have put pressure on production and increased Key data
cost of domestic steelmakers. On the other hand, Tata Steel’s (TATA IN) Bloomberg /Reuters Code TATA IN/TATA.BO
India operations’ access to captive iron ore mines has been a boon, as 1) it Current /Dil Shares O/S (mn) 1204/1204
has been insulated from the sharp rise in iron ore prices, and 2) it has been Mkt Cap (INR bn/USD mn) 770/10,504
able to ramp up production faster than the industry (April-December 2020 Daily Volume (3M NSE Avg) 19,384,392
TATA’s crude steel production fell ~10% YoY vs industry’s ~13%), leading Face Value (INR) 10
1 USD = INR 73.3
to better margin and growth prospects than peers.
Note: pricing as on 18 January 2021; Source: Bloomberg
Strengthening balance sheet: deleveraging remains focus area
Price & Volume
After a sharp rise in net debt over FY18-20, the company is focused on
debt reduction with deleveraging commitment of USD 1.0bn annually. 800 80
During H1FY21, it generated INR 85bn free cashflow and reduced net 600 60
debt by ~INR 85bn (~INR 82bn in Q2FY21), led by capex
400 40
rationalization and working capital control. Deleveraging alone is likely
200 20
to add ~10% to Mcap annually even if EV remains the same. Thus, we
expect a decline interest expenses CAGR of ~5% over FY20-23E, 0 0
contributing ~350bp to PAT growth by FY23E.
Vol. in mn (RHS) Tata Steel (LHS)
Letting go: Netherlands divestment to improve margin Source: Bloomberg
TATA intends to demerge Tata Steel Europe (TSE) into Netherlands and Shareholding (%) Q4FY20 Q1FY21 Q2FY21 Q3FY21
UK businesses. While the UK business will continue to be a part of the Promoter 34.4 34.4 34.4 34.4
company, it is in active discussions with Swedish steelmaker SSAB Institutional Investor 42.1 41.6 41.3 42.7
(Svenskt Stål AB, English: Swedish Steel, NASDAQ ticker: SSAB) to sell Other Investor 5.9 5.8 5.6 5.8
the Netherlands business. TSE has long-term debt of EUR 1.7bn plus General Public 17.6 18.2 18.7 17.1
working capital. Proceeds from the sale would help trim overall debt. Source: BSE
Apart from debt reduction, divestment also will help TATA to expand Price performance (%) 3M 6M 12M
margin as India operations (past five-year average of 25.5%) earns Sensex 21.5 31.2 15.8
Tata Steel 69.3 90.0 34.6
higher EBITDA than Europe’s 4.3%. JSW Steel 23.2 85.3 40.1
SAIL 94.8 86.3 29.4
Jindal Steel & Power 45.8 59.8 59.6
Source: Bloomberg
Valuation
We believe TATA’s access to captive iron ore, focus on strengthening
India operations, making UK business self-sufficient, exiting Netherlands 200
business and deleveraging efforts will enable it to expand margin by

Rebased to 100
150
~650bp over FY20-23E and bolster return ratios. Further, completion of
100
Kalinganagar’s (Odisha) 5mn tonne expansion would consolidate its
presence in the domestic market in the long run and strengthen product 50
mix. Reorganization of its India business by folding all businesses into 0

four verticals - long products, downstream, mining and utilities & infra -
Tata Steel Sensex
is likely to provide synergy. Thus, we initiate on Tata Steel with a Buy
Source: Bloomberg
rating and a TP of INR 860 based on a SOTP valuation.
Key Financials
FY20 1,369,768 (11.5) 174,631 12.7 53,460 (48.4) 46.7 7.5 5.3 1.1 10.2
FY21E 1,413,703 3.2 279,363 19.8 90,444 69.2 79.0 11.5 9.5 1.0 5.9
FY22E 1,469,412 3.9 282,067 19.2 100,490 11.1 87.8 11.4 9.6 0.9 5.4
FY23E 1,523,141 3.7 293,061 19.2 113,052 12.5 98.7 11.6 10.1 0.8 4.9

Tata Steel
Investment summary
Valuation trigger
 Access to captive iron ore mines fulfills
Positive conclusion of the ongoing
100% of iron ore requirement and helps
exit deals of Southeast Asia and
Netherlands operations in the it to remain insulated from any sharp
900 upcoming years rise in iron ore prices and achieve
2
800 higher domestic production
1
700
600  Renewed focus on debt reduction with
Leaner and stronger
500 deleveraging commitment of USD 1bn
balance sheet on the back
400 of faster-than-expected annually is likely to strengthen balance
300 deleveraging
200
sheet
Jul-21
Jul-20
May-20
May-21
Sep-20
Sep-21
Jan-20
Jan-22
Nov-20
Jan-21
Nov-21
Mar-21
Mar-20
 Continued efforts to exit overseas will

be key drivers for margin expansion
Source: Bloomberg, Elara Securities Estimate
SOTP valuation Valuation trigger

(INR mn) FY23E 1. Positive conclusion of the ongoing exit
SOTP valuation
deals of Southeast Asia and
Tata Steel India EBITDA 2,49,760
Netherlands operations in the
Target multiple (x) 6.0
Target EV-A 14,98,558
upcoming years
Tata Steel Europe EBITDA 43,301 2. Leaner and stronger balance sheet on
the back of faster-than-expected
Target EV-B 1,73,204
deleveraging
Total Target EV (A+B) 16,71,762
Less: net debt 6,86,950
Key risks
TP (INR) 860  Demand slowdown in the domestic
CMP (INR) 667 markets from key end-user industries
Upside (%) 29.0 coupled with unfavorable steel prices
Note: pricing as on 18 January 2021; Source: Elara Securities Estimate may be a drag on margin
Valuation: five-year average EV/EBITDA stands at 6.0x  Slowdown in demand from Europe
15 post new COVID-19 strain
 No monetary support from the UK

10
government
(x)
Our assumptions
0
 Standalone volume and realization
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
CAGR of ~2% each over

EV/EBITDA (x) Average +1SD FY20-23E
-1SD +2SD -2SD
 Standalone EBITDA per tonne CAGR of
~9% over FY20-23E
Consolidated EBITDA per tonne CAGR of ~17% over FY20-23E
 EBITDA margin expansion of 650bp
12,000 over FY20-23E.
10,000
8,000
(INR)
6,000
4,000
2,000
0

Tata Steel

Net Revenue 1,369,768 1,413,703 1,469,412 1,523,141 1,550 22
Operating profit 146,232 255,707 258,501 269,819 19.8
19.2 19.2
Add:- Other operating Income 28,399 23,657 23,566 23,242 1,500 20
(INR bn)
EBITDA 174,631 279,363 282,067 293,061 1,450 18
Less :- Depreciation & Amortization 84,407 85,691 86,489 87,419
(%)
1,400 16
Add: Other income 18,435 8,438 8,874 9,675
1,350 12.7 14
EBIT 108,658 202,110 204,451 215,317
Less:- Interest Expenses 75,335 74,423 69,731 63,866 1,300 12
Add/Less: - Extra-ordinaries (35,641) 3,519 2,504 2,504
1,250 10
PBT (2,317) 131,206 137,224 153,954
Less :- Taxes (25,684) 39,733 36,416 40,584
Ferrous Metals
Reported PAT 23,367 91,473 100,808 113,370
3,829 (318) (318) (318)
profits of JV and associate
Reported PAT after Minority Interest 27,196 91,154 100,490 113,052
Adjusted PAT 53,460 90,444 100,490 113,052
Balance Sheet (INR mn) FY20 FY21E FY22E FY23E Adjusted profit growth trend
Share Capital 11,450 11,450 11,450 11,450 69.2
200,000 80
Reserves & others 724,314 823,901 915,539 1,017,448
Minority Interest 25,866 26,184 26,502 26,821 150,000
12.5 40
(INR mn)
Borrowings 1,163,282 1,075,497 989,596 877,214 100,000 11.1
Deferred Tax (Net) 92,614 91,101 89,616 86,468
(%)
50,000 0
Other liabilities 105,776 104,551 104,132 102,249
Total Liabilities 2,123,301 2,132,684 2,136,836 2,121,649 0
(40)
Gross Block 1,961,297 1,985,980 2,015,936 2,045,893 (50,000)
Less:- Accumulated Depreciation 649,988 735,680 822,169 909,588 (48.4)
(100,000) (80)
Net Block 1,311,309 1,250,300 1,193,767 1,136,305 FY20 FY21E FY22E FY23E
Add:- Capital work in progress 188,621 214,621 235,621 266,621
Adjusted PAT Adj. PAT Growth
Goodwill 40,545 40,545 40,545 40,545
Non-current investments 28,533 28,533 28,533 28,533 Source: Company, Elara Securities Estimate
Net Working Capital 63,333 44,382 62,125 66,276
Other assets 376,094 382,186 381,162 393,106
Total Assets 2,123,301 2,132,684 2,136,836 2,121,649 Return ratios
Cash Flow Statement (INR mn) FY20 FY21E FY22E FY23E 14
11.5 11.6
11.4
Cash profit adjusted for non-cash items 132,689 241,637 246,669 251,832 12
Add/Less : Working Capital Changes 35,146 18,952 (17,744) (4,151) 10
Operating Cash Flow 167,835 260,588 228,926 247,682 7.5
8 10.1
(%)
9.5 9.6
Less:- Capex (193,472) (50,683) (50,956) (60,957)
6
Free Cash Flow (25,637) 209,906 177,969 186,725
Financing Cash Flow 111,527 (155,000) (164,902) (189,275) 4 5.3
Investing Cash Flow (38,757) 728 8,200 (2,269) 2
Net change in Cash 47,133 55,634 21,267 (4,819) 0
Ratio Analysis FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
Income Statement Ratios (%) ROE ROCE
Revenue Growth (11.5) 3.2 3.9 3.7
EBITDA Growth (40.6) 60.0 1.0 3.9
Adj. PAT Growth (48.4) 69.2 11.1 12.5
EBITDA Margin 12.7 19.8 19.2 19.2
Adj. Net Margin 3.9 6.4 6.8 7.4
ROE 7.5 11.5 11.4 11.6
ROCE 5.3 9.5 9.6 10.1
Adjusted EPS (INR) 46.7 79.0 87.8 98.7
EPS Growth (%) (48.4) 69.2 11.1 12.5
DPS (INR) 10.0 8.0 10.0 10.0
P/E Ratio (x) 14.3 8.4 7.6 6.8
EV/EBITDA (x) 10.2 5.9 5.4 4.9
EV/Sales (x) 1.3 1.2 1.0 0.9
P/BV(x) 1.1 1.0 0.9 0.8
Dividend Yield (%) 1.5 1.2 1.5 1.5

Tata Steel
Company Description
Tata Steel (TATA IN), established in 1907, is the oldest steelmaker of India. TATA’s current India capacity stands at
19.6mn tonne and has access to captive iron ore & coal mines in India. While its captive iron ore mines fulfill its entire
iron ore requirements, coking coal mines fulfill ~25-30% requirement. In FY20 for India operations, ~78% of sales was
contributed by flat products and ~22% by long products. The company also has 12.1mn tonne capacity in Europe
(UK and Netherlands). In FY20, Europe operations revenue stood at INR 559bn accounting for ~41% of consolidated
revenue but EBITDA margin contracted by 1.2 % (EBITDA of INR 6.6bn). Apart from India, it also owns mining assets
in Canada. In the past three years, the company has made three acquisitions. In May 2018, it completed acquisition
of Bhushan Steel (BSL) for INR 352bn for settling existing financial debt of BSL. Tata Steel BSL also completed
acquisition of Bhushan Energy in June 2019 to improve cost efficiency for INR 8bn. In April 2019, it completed
acquisition of Usha Martin’s steel business through its subsidiary Tata Sponge Iron (now known as Tata Steel Long
Products), thereby expanding its long products portfolio.
Board of Directors & Management

TV Narendran, CEO & MD Primary Market Advisory Committee of the SEBI and
TV Narendran is CEO & MD of Tata Steel. He has 30 years member of the task force set up by SEBI that drafted the
of experience in the mining and metals industry. As CEO, takeover code. He also was Member of the Global
he oversaw the acquisition of Bhushan Steel (now known Preparers Forum, the advisory body to the International
as Tata Steel BSL) and the steel business of Usha Martin. Accounting Standards Board London. He is currently the
Earlier, as Managing Director, he successfully executed member of International Integrated Reporting Council
Tata Steel's Greenfield expansion at Kalinganagar. He is UK, Working Group on Group Insolvency set up by the
currently on the boards of Tata Steel and Tata Steel Insolvency and Bankruptcy Board of India, Global Task
Europe. He is Chairman of Tata Steel BSL, Tata Sponge Force on Climate Related Financial Disclosures set up by
Iron, and the Board of Governors of XLRI Jamshedpur. He the Financial Stability Board, Basel Switzerland. He is an
is a Board Member of the World Steel Association and honors graduate in Commerce from Calcutta University
Member of its Executive Committee. He was Co-chair of and a Fellow Member of the Institute of Chartered
the Mining & Metals Governors Council of the World Accountants of India.
Economic Forum over CY16-18. He is also Member of the Natarajan Chandrasekaran, Chairman of Tata Sons
BRICS Business Council. He has a degree in Mechanical
Natarajan Chandrasekaran is Chairman of Tata Sons
Engineering from NIT Trichy and a MBA from IIM Calcutta.
(holding company of Tata Group) and former CEO and
He is a recipient of Distinguished Alumnus Awards from
MD of Tata Consultancy Services (TCS). Under his
NIT Trichy and IIM Calcutta.
leadership, TCS became the largest private sector
Koushik Chatterjee, ED & CFO employer. He has been conferred honorary degrees and
Koushik Chatterjee joined Tata Steel in 1995 at doctorates by several universities in India and abroad,
Jamshedpur. He was then transferred to Tata Sons in including KIIT University (2012), SRM University (2010)
1999 in the Group Executive Office. He re-joined Tata and Nyenrode Business Universiteit in the Netherlands,
Steel on 1 August 2003 and appointed as Group CFO in among others. He has played an active role in Indo-US
2008. He was inducted on the Board of Tata Steel effective and India-UK CEO forums and is part of India’s business
9 November 2012. Further, he was appointed as Group taskforces for Australia, Brazil, Canada, China, Japan and
Executive Director (Finance & Corporate), Tata Steel in Malaysia. He served as Executive Chairman of NASSCOM,
2013 and reappointed as Whole-Time Director effective 9 India’s apex trade body for IT services firms over CY12-13
November 2017, designated as Executive Director and and continues to be a member of its Governing Executive
Chief Financial Officer. He has been a member of the Council.

Tata Steel
Coverage History
800
1
700
600
500
400
Ferrous Metals
300
200
Jul-20
Mar-20
Jan-20
Feb-20
Apr-20
Jun-20
Sep-20
Aug-20
Oct-20
Nov-20
Jan-21
Dec-20
May-20
Not Covered Covered

1 18-Jan-2021 Buy INR 860 INR 667


Tata Steel
Notes

Initiating Coverage
Jindal Steel and Power

Deleveraging path Rating: Buy
Setting priorities: reduce net debt by ~58% by end-FY23 Target Price: INR 353
Upside: 25%
Jindal Steel and Power (JSPL) net debt fell by ~INR 70bn to INR 289bn in
H1FY21, primarily led by INR 53.6bn debt reduction post completing the
first tranche of Oman divestment (remaining to be completed by end- Key data

FY21). Management intends to reduce net debt to INR 150bn by end-FY23 Bloomberg /Reuters Code JSP IN/JNSP.BO
before starting any major capex. The targeted net debt reduction is Current /Dil Shares O/S (mn) 1020/1020
equivalent to ~50% of the current market cap and is augmented with no Mkt Cap (INR bn/USD mn) 288/3,932
major planned capex, consistent rise in utilization of existing capacity and Daily Volume (3M NSE Avg) 599,381
access to low-cost iron ore inventory. Further, management is open to Face Value (INR) 1
divest all non-core assets (core assets are steel operations in India) at an 1 US$= INR 73.3
appropriate price, which could expedite debt reduction efforts. Note: pricing as on 18 January 2021; Source: Bloomberg
Going local: bolster higher domestic sales to lift margin Price & Volume
The lull in domestic demand during the initial months of FY21 prompted 400 80
JSPL to increase export sales. However, the gradual recovery in 300 60
domestic demand, led by phase-wise unlocking of the economy, helped
200 40
it to taper off exports. Subsequently, exports contribution to total sales
volume came off from the peaks of ~74% in April to ~58% in Q1FY21, 100 20
which fell further to ~38% in Q2FY21 and ~21% in Q3FY21. The 0 0
company targets to reduce exports to ~17-18% by end-FY21. Apart from Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
this, JSPL intends to export primarily finished steel or value-added steel Vol. in mn (RHS) Jindal Steel & Power (LHS)
instead of semi-finished products. Therefore, we believe rising domestic Source: Bloomberg
sales, firm steel prices and higher exports of value-added or finished Shareholding (%) Q4FY20 Q1FY21 Q2FY21 Q3FY21
steel will help expand margin by ~500bp over FY20-23E as spread in Promoter 60.5 60.5 60.5 60.5
the domestic markets is higher than exports. Institutional Investor 25.3 25.6 25.5 26.5
Other Investor 5.2 4.5 4.5 4.2
Operating light: focus remains on cutting opex cost longer term
General Public 9.0 9.4 9.5 8.8
JSPL is planning to set up a slurry pipeline from its Barbil (Odisha) pellet Source: BSE
plant to Angul (Odisha) steel plant, which is likely to reduce Price performance (%) 3M 6M 12M
transportation cost by INR 1,100 per tonne. Further, its subsidiary Jindal Sensex 21.5 31.2 15.8
Power has won Gare Palma IV/1 (Chhattisgarh) coal block recently, Jindal Steel 45.8 59.8 59.6
Tata Steel 69.3 90.0 34.6
which is likely to reduce its dependence on purchased coal, leading to
JSW Steel 23.2 85.3 40.1
annual cost savings of ~INR 5.5bn, ~7% of FY20 EBITDA. SAIL 94.8 86.3 29.4
Source: Bloomberg
Valuation
With JSPL’s product mix tilted toward long products, it is likely to be
200
a key beneficiary of government’s strong impetus on investments in
Rebased to 100
infrastructure. In the near term, access to low-priced iron ore 150
inventory augurs well. With assets already in place, return ratios and 100
free cashflow are likely to increase, with further ramp-up in
50
production while deleveraging is expected to reduce the risk profile
of the firm. Thus, we initiate on JSPL with a Buy rating and a TP of INR 0
353 based on a SOTP valuation, valuing standalone business and Jindal Steel & Power Sensex
other businesses at 5x and 4x EV/EBITDA, respectively. Source: Bloomberg
Key Financials
FY20 366,761 (5.9) 78,539 21.4 (326) - (0.3) (0.1) 5.3 0.9 8.2
FY21E 369,227 0.7 124,625 33.8 42,192 - 41.4 13.2 12.0 0.9 4.7
FY22E 401,804 8.8 109,004 27.1 31,719 (24.8) 31.1 9.5 10.2 0.9 4.9
FY23E 431,287 7.3 113,238 26.3 36,691 15.7 36.0 10.1 10.1 0.8 4.2

Investment summary
Valuation trigger
 Reduce net debt to INR 150bn by
Margin expansion
on firm steel prices end-FY23E, as per guidance, before
400 and low cost iron starting any major capex and divest
ore inventory non-core assets at an appropriate
2
300 1
price
200  Expand margin by ~500bp over

Reduction in net FY20-23E by bolstering domestic
100 debt to ~INR 150bn
during FY20-23 sales, firm steel prices and higher
0
exports of value-added or finished
steel
Jul-21
Jul-20
May-20
May-21
Sep-20
Sep-21
Jan-20
Jan-22
Nov-20
Jan-21
Nov-21
Mar-21
Mar-20
 Lower transportation cost by INR

Source: Bloomberg, Elara Securities Estimate 1,100 per tonne of iron ore by
setting up a slurry pipeline
SOTP valuation
(INR mn) FY23E  Expected annual cost savings of
SOTP valuation ~INR 5.5bn after ramp-up
Standalone EBITDA 99,740
Target multiple (x) 5.0 production from allocated coal
Target EV-A 4,98,698 block
Jindal Power (JPL) 14,747
Target EV-B 58,990
Others (1,249) Valuation trigger
Target EV-C (4,995)
1. Margin expansion on firm steel
Overall Target EV (A+B+C) 5,52,692 prices and low cost iron ore
Less: net debt 1,92,628 inventory.
2. Reduction in net debt to ~INR
TP (INR) 353
CMP (INR) 282 150bn during FY20-23
Upside (%) 25.0
Key risks
Valuation: five-year average EV/EBITDA stands at 6.8x
 Sharp increase in coking coal prices
20
 Merchant power traffic remaining
15
weak
10
(x)
 Sharp increase in iron ore prices

5 over FY22-23
0
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Our assumptions
EV/EBITDA (x) Average +1SD  Volume CAGR of ~11% over FY20-
-1SD +2SD -2SD
FY23E
 EBITDA per tonne CAGR of ~8%
EBITDA per tonne CAGR of ~8% over FY20-23E over FY20-FY23E
20,000
 Margin expansion of ~500bp over
FY20-23E
15,000
(INR)
10,000
5,000
0


Net Revenue 366,761 369,227 401,804 431,287 470 39
Operating profit 76,125 120,248 106,052 110,116 33.8
Add:- Other operating Income 2,414 4,378 2,952 3,122 420 34
(INR bn)
EBITDA 78,539 124,625 109,004 113,238 27.1 26.3
370 29
Less :- Depreciation & Amortization 38,672 37,152 38,199 39,218
(%)
Add: Other income 262 408 412 417 320 21.4 24
EBIT 40,129 87,881 71,217 74,437
Add/Less: - Extra-ordinaries (1,094) - - - 220 14
PBT (2,458) 52,531 38,534 45,639 FY20 FY21E FY22E FY23E
Less :- Taxes 1,539 13,244 9,720 11,853
Ferrous Metals
Reported PAT (3,997) 39,287 28,814 33,786
2,905 2,905 2,905 2,905
profits of JV and associate
Reported PAT after Minority Interest (1,092) 42,192 31,719 36,691
Adjusted PAT (326) 42,192 31,719 36,691
Balance Sheet (INR mn) FY20 FY21E FY22E FY23E Adjusted profit trend
Share Capital 1,020 1,020 1,020 1,020 50
Reserves & others 320,351 317,638 346,452 380,238
40
Minority Interest (7,764) (7,764) (7,764) (7,764)
(INR bn)
Borrowings 368,244 334,744 287,744 243,244 30
Deferred Tax (Net) 56,226 49,065 48,716 47,861 20
10
Total Liabilities 754,267 707,257 687,239 675,716
Gross Block 959,671 873,223 885,223 897,223 0
Less:- Accumulated Depreciation 260,443 297,595 335,795 375,013 (10)
Net Block 699,228 575,627 549,428 522,210 FY20 FY21E FY22E FY23E
Add:- Capital work in progress 19,745 28,745 30,745 32,745
Adjusted PAT
Goodwill 6,098 6,098 6,098 6,098
Non-current investments 1,430 1,430 1,430 1,430 Source: Company, Elara Securities Estimate
Net Working Capital 4,829 48,407 41,297 49,491
Other assets 13,498 12,960 13,264 13,126
Total Assets 754,267 707,257 687,239 675,716 Return ratios
Cash Flow Statement (INR mn) FY20 FY21E FY22E FY23E 15 13.2
10.2 10.9
Cash profit adjusted for non-cash items 78,489 104,220 98,935 100,531
Add/Less : Working Capital Changes 13,482 (43,578) 7,110 (8,194) 10 12.0
Operating Cash Flow 91,971 60,642 106,046 92,337 5.3 10.1
9.5
(%)
Less:- Capex (33,198) 77,448 (14,000) (14,000) 5

Free Cash Flow 58,774 138,090 92,046 78,337
Financing Cash Flow (58,074) (114,485) (81,166) (73,252) 0
Investing Cash Flow 4,146 946 108 555 (0.1)
Net change in Cash 4,846 24,551 10,987 5,639 (5)
Ratio Analysis FY20 FY21E FY22E FY23E
Revenue Growth (5.9) 0.7 8.8 7.3
EBITDA Growth (6.6) 58.7 (12.5) 3.9
Adj. PAT Growth - - (24.8) 15.7
EBITDA Margin 21.4 33.8 27.1 26.3
Adj. Net Margin (0.1) 11.4 7.9 8.5
ROE (0.1) 13.2 9.5 10.1
ROCE 5.3 12.0 10.2 10.9
Adjusted EPS (INR) (0.3) 41.4 31.1 36.0
EPS Growth (%) - - (24.8) 15.7
P/E Ratio (x) - 6.8 9.1 7.9
EV/EBITDA (x) 8.2 4.7 4.9 4.2
EV/Sales (x) 1.8 1.6 1.3 1.1
P/BV(x) 0.9 0.9 0.9 0.8
Note: pricing as 18 January 2021; Source: Company, Elara Securities Estimate

Company Description
Jindal Steel & Power (JSPL IN), promoted as Orbit Steel by the late OP Jindal in 1979, is a leading steelmaker of India.
The company has primarily two business divisions: steel and power. India operation has steel capacity of 8.6mn tonne,
9mn-tonne pellet plant and 3,400-MW thermal power capacity at Tamnar in Chhattisgarh under independent power
projects (IPP). Apart from these, it has captive power capacity of 1,634MW. Over FY14-20, JSPL has expanded domestic
steel capacity by ~2.9x from 3.0mn tonne to 8.6mn tonne, power capacity by 2.4x from 1,000MW to 3,400MW and
pellet capacity by~2.0x from 4.5mn tonne to 9.0mn tonne. The company has tied up ~38% of power capacity under
the power purchase agreement (PPA). JSPL’s global operations include 2.4mn-tonne steel plant in Oman (likely to exit
by end-FY21), Australia, South Africa and Mozambique. It has coal mines in Mozambique and South Africa. Apart from
this, it also owns 60.38% stake in Australia-based Wollongong Coal, which comprises two coking coal mines –
Wongawilli & Russel Vale.

Naveen Jindal, Chairman Akhauri Sinha, Director of Finance
Naveen Jindal is Chairman of JSPL, Chancellor of the OP Akhauri Sinha has 37 years of experience across public &
Jindal Global University (JGU), and President of the Flag private sectors and foreign banks in India and abroad. He
Foundation of India (FFI). He was former Member of has held several senior positions and managed various
Parliament and Minister for Power in the Government of functions, such as corporate banking, equity and debt
Haryana. He represented Kurukshetra Parliamentary capital markets, international banking and risk
Constituency in the 14th and 15th Lok Sabha. He has a management. His last banking assignment was MD & CR,
degree in Commerce from Hans Raj College, Delhi Royal Bank of Canada, India. He holds postgraduate
University, in 1990 and completed an MBA at the degree in Business Administration along with MSc, LL.B,
University of Texas at Dallas in 1992. CAIIB and DPCA.
Vidya Rattan Sharma, Managing Director

Vidya Rattan Sharma is currently Managing Director of
JSPL. Prior to joining JSPL, he was Group CEO of
AbulKhair Group, managing its steel, power, cement and
mining businesses. He also has worked as Executive
Director of Ispat Industries, Joint MD & whole-time
Director of Bhushan Group. He also worked in
management position with other steel companies
overseas, including Socialist Steel Libiya, Lloyd Steel Group
and Arrasate Steel Spain. He is a degree in Mechanical
Engineering and an MBA from UK.

Coverage History
350
1
300
250
200
150
Ferrous Metals
100
50
Mar-20
Jul-20
Jan-20
Feb-20
Apr-20
Jun-20
Sep-20
Aug-20
Oct-20
Nov-20
Jan-21
Dec-20
May-20
Not Covered Covered

1 18-Jan-2021 Buy INR 353 INR 282


Notes

Initiating Coverage
Steel Authority of India

Sailing on price buoyancy Rating: Accumulate
In-house benefits: captive iron ore to reduce cost pressure Target Price: INR 77
Upside: 17%
Steel Authority of India (SAIL) captive iron ore mines meet its total iron
ore requirements and shield it from the sharp rise in iron ore prices. SAIL
is expanding iron ore capacity along with augmentation of steelmaking Key data
capacity to ~21mn tonne in the near term and 50mn tonne by CY30, as Bloomberg /Reuters Code SAIL IN/ SAIL.BO
per its Vision 2030. We believe existing as well as upcoming iron ore Current /Dil Shares O/S (mn) 4,130/4,130
capacity will continue to fulfill its iron ore requirements of not only Mkt Cap (INR bn/USD mn) 272/3,717
existing capacity but upcoming as well. Daily Volume (3M NSE Avg) 46,581,133
Face Value (INR) 10
Value-added: product mix improvement to support realization 1 USD = INR 73.3
A change in product mix has favorably affected SAIL’s realization. Over Note: pricing as on 18 January 2021; Source: Bloomberg
the past few years, the share of high margin rail products has gone up
from ~6% in FY17 to ~10% in FY20. Simultaneously, the shift in product Price & Volume
mix toward other value-added products such as CRC has also gone up 100 400
from ~5% in FY17 to 6% in FY20. Consequently, SAIL’s realization has 80 300
improved at a CAGR of ~9% over FY17-20 and FY20 realization was 60
200
~10% premium to domestic HRC prices vs a discount of ~4% in FY17. 40
20 100
Key beneficiary: the highest sensitivity to price increase
0 0
SAIL’s cost structure is the highest among peers, and, thus, it has the Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
highest sensitivity to EBITDA per tonne on price increase. A 1% change Vol. in mn (RHS) SAIL (LHS)
in price, with cost being the same, has a 6.4% positive impact on EBITDA Source: Bloomberg
per tonne vs 4.0% for Tata Steel, 5.9% for JSW Steel and 2% for JSPL.
Shareholding (%) Q4FY20 Q1FY21 Q2FY21 Q3FY21
Therefore, SAIL is likely to be one of the key beneficiaries of rise in
Promoter 75.0 75.0 75.0 75.0
domestic steel prices. Institutional Investor 17.5 16.9 16.9 17.1
New revenue stream: booster from the sale of surplus iron ore Other Investor 2.2 2.2 1.5 2.2
General Public 5.3 5.9 6.6 5.7
The Ministry of Mines has allowed SAIL 1) to sell ~25% of total mineral Source: BSE
production of the previous year in the open market for two years from
Price performance (%) 3M 6M 12M
16 September 2019, and 2) to dispose of old stock of 70mn tonne of Sensex 21.5 31.2 15.8
low-grade iron fines & ores (including slime) lying dumped across SAIL 94.8 86.3 29.4
captive mines of the company. The sale of iron ore contributed ~5% or Tata Steel 69.3 90.0 34.6
~INR 1bn to EBITDA during Q2FY21. JSW Steel 23.2 85.3 40.1
Jindal Steel & Power 45.8 59.8 59.6
Source: Bloomberg
Valuation
Firm iron ore prices are not only expected to keep steel prices strong
200
but also enable SAIL to earn higher revenue from the sale of surplus
Rebased to 100
iron ore, thereby offering duals benefits. Apart from this, due to high 150
cost structure, the company is likely to see the highest delta in margin 100
(16.6% by FY23E vs 5.8% in H1FY21) with rise in steel prices. Further,
50
with major capex being completed in a short span of time, SAIL is
expected to see double-digit volume growth in the next two years. 0
Thus, we initiate on SAIL with an Accumulate rating and a TP of INR SAIL Sensex
77 based on 5.0x FY23E EV/EBITDA. Source: Bloomberg
Key Financials
FY20 610,249 (7.9) 101,990 16.7 25,618 4.5 6.2 6.6 7.9 0.7 7.8
FY21E 685,126 12.3 113,110 16.5 34,579 35.0 8.4 8.3 8.4 0.7 5.9
FY22E 772,137 12.7 126,866 16.4 44,924 29.9 10.9 9.8 9.9 0.6 5.1
FY23E 833,908 8.0 138,242 16.6 53,240 18.5 12.9 10.5 10.6 0.5 4.6

Valuation trigger Investment summary
Ramping up production  Captive iron ore mines would reduce

100
post completion of cost pressure to provide the company
expansion
80 2 an edge over peers
1
60  Increase in share of value-added
products to support realization
40 Strategic sale of SAIL’s Salem
(Tamil Nadu), Bhadravati  Sale of surplus iron ore to provide
20 (Karnataka) and Durgapur incremental revenue
(West Bengal) steel plants
0
Jul-21
Jul-20
May-20
May-21
Sep-20
Sep-21
Jan-20
Jan-22
Nov-20
Jan-21
Nov-21
Mar-21
Mar-20
Valuation trigger
1. Ramping up production post
Source: Bloomberg, Elara Securities Estimate completion of expansion
EV/EBITDA valuation overview 2. Strategic sale of SAIL’s Salem (Tamil
(INR mn) FY23E
Nadu), Bhadravati (Karnataka) and
EV/EBITDA based valuation Durgapur (West Bengal) steel plants
EBITDA 1,38,242
Target EV 6,91,212 Key risks
Less: net debt 3,72,641  Sharp increase in coking coal prices
 Delay in ramping up of upcoming
capacity
TP (INR) 77
CMP (INR) 66  Any capex overrun
Upside (%) 16.9
Our assumptions
Valuation: five-year average P/BV stands at 0.6x  Volume CAGR of ~11% over FY20-
5 FY23E
4
 EBITDA per tonne largely flat over
3 FY20-FY23
2
(x)
 Margin largely flat over FY20-23

1
0
(1)
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
P/BV Average +1SD -1SD +2SD -2SD
EBITDA per tonne largely flat over FY20-23
7,350
7,300
7,250
(INR)
7,200
7,150
7,100
7,050
7,000

Financials (YE March)

Net Revenue 610,249 685,126 772,137 833,908
Operating profit 95,633 108,301 121,871 133,137 1,000 16.7 17
16.5 16.6
16.4
Add:- Other operating Income 6,357 4,809 4,995 5,105 800
(INR bn)
EBITDA 101,990 113,110 126,866 138,242 600
(%)
Less :- Depreciation & Amortization 37,551 39,333 39,630 40,395 16
400
Add: Other income 9,852 7,685 7,762 7,839
EBIT 74,292 81,461 94,997 105,686 200
Add/Less: - Extra-ordinaries (7,718) 2,224 - - FY20 FY21E FY22E FY23E
Ferrous Metals
PBT 31,707 51,622 64,178 76,057 Net Revenue EBITDA Margin
Less :- Taxes 11,491 15,487 19,253 22,817
Reported PAT 20,215 36,135 44,924 53,240
Adjusted PAT 25,618 34,579 44,924 53,240
Balance Sheet (INR mn) FY20 FY21E FY22E FY23E
Share Capital 41,305 41,305 41,305 41,305
Adjusted profit growth trend
Reserves 356,469 392,604 437,528 490,768 60 35.0 40
29.9
Borrowings 538,032 448,532 432,032 414,532 50
30
(INR bn)
40
18.5
Total Liabilities 993,892 944,660 975,305 1,010,130
(%)
30 20
Gross Block 1,127,094 1,153,094 1,178,094 1,198,094
20
Less:- Accumulated Depreciation 436,915 476,248 515,879 556,274 4.5 10
10
Net Block 690,179 676,846 662,216 641,821
Add:- Capital work in progress 87,516 103,516 127,516 137,516 0 0
Non-current investments 15,861 15,861 15,861 15,861
Net Working Capital 148,465 72,588 93,355 137,394 Adjusted PAT Adj. PAT Growth
Cash & current investments 3,633 36,645 39,405 41,891 Source: Company, Elara Securities Estimate
Other assets 48,238 39,205 36,953 35,648
Total Assets 993,892 944,660 975,305 1,010,130
Cash Flow Statement (INR mn) FY20 FY21E FY22E FY23E Return ratios
Cash profit adjusted for non-cash items 82,781 99,847 107,613 115,425
12 10.6
Add/Less : Working Capital Changes (100,468) 75,878 (20,767) (44,039) 9.9
Operating Cash Flow (17,686) 175,725 86,846 71,386 10
8.4 10.5
Less:- Capex (41,529) (42,000) (49,000) (30,000) 7.9 9.8
(%)
Free Cash Flow (59,216) 133,725 37,846 41,386 8

8.3
Financing Cash Flow 46,732 (117,430) (45,100) (48,044)
6
Investing Cash Flow 13,922 16,717 10,014 9,144 6.6
Net change in Cash 1,438 33,012 2,760 2,487 4
Ratio Analysis FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
Revenue Growth (7.9) 12.3 12.7 8.0
EBITDA Growth 4.8 10.9 12.2 9.0 Source: Company, Elara Securities Estimate
Adj. PAT Growth 4.5 35.0 29.9 18.5

EBITDA Margin 16.7 16.5 16.4 16.6
Adj. Net Margin 4.2 5.0 5.8 6.4
ROE 6.6 8.3 9.8 10.5
ROCE 7.9 8.4 9.9 10.6
Adjusted EPS (INR) 6.2 8.4 10.9 12.9
EPS Growth (%) 4.5 35.0 29.9 18.5
P/E Ratio (x) 10.6 7.9 6.1 5.1
EV/EBITDA (x) 7.8 5.9 5.1 4.6
EV/Sales (x) 1.3 1.0 0.8 0.8
P/BV(x) 0.7 0.7 0.6 0.5

Company Description
SAIL (SAIL IN), promoted by the government of India (GoI), is a Maharatna company and one of the largest
steelmakers of India. As on December 2020, the GoI holds a 75% stake in the company. SAIL operates five integrated
steel plants at Bhilai (Chhattisgarh), Rourkela (Odisha), Durgapur & Burnpur (West Bengal) and Bokaro (Jharkhand).
Apart from these, it operates three special steel plants at Salem (Tamil Nadu), Durgapur (West Bengal) and Bhadravati
(Karnataka). Its steel plants are fully backed by captive iron ore mines situated in the eastern states of India. It has
initiated growth capex and post completion of these projects, steel capacity is likely to increase to ~21mn tonne.

Soma Mondal, Chairwoman Amit Sen, Director (Finance)
Soma Mondal was appointed Chairwoman on 1 January Amit Sen is a Chartered Accountant with 31 years of
2021. She is not only the first woman functional Director experience in the manufacturing sector, handling various
but also the first woman Chairman of the company. She roles in finance. He joined Bhilai Steel Plant of SAIL in 1993
has 35 years of experience in metal industry. She started and has been with SAIL ever since. Prior to joining SAIL,
her career as a graduate engineer trainee at NALCO and he worked with Lovelock & Lewes, Kolkata, (a PwC firm),
over time was promoted to Director (Commercial) of and BHEL. His area of expertise includes cost
NALCO in 2014. She joined SAIL as Director (Commercial) management and commercial functions, especially the
in March 2017. She is a member of CII-National financial and commercial aspects of large turnkey
Committee. She graduated in Electrical Engineering from contracts.
NIT, Rourkela in 1984.

Coverage History
100
80
1
60
40
Ferrous Metals
20
Jul-20
Mar-20
Sep-20
Jan-20
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Nov-20
Jan-21
Dec-20
May-20
Not Covered Covered

1 18-Jan-2021 Accumulate INR 77 INR 66


Disclosures & Confidentiality for non U.S. Investors

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of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views
expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from
maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views
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Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private
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mechanism.
Elara Securities (India) Private Limited was incorporated in July 2007 as a subsidiary of Elara Capital (India) Private Limited.
Elara Securities (India) Private Limited is a SEBI registered Stock Broker in the Capital Market and Futures & Options Segments of National Stock Exchange of India
Limited [NSE], in the Capital Market Segment of BSE Limited [BSE] and a Depository Participant registered with Central Depository Services (India) Limited [CDSL].
Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.
The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in
last five years. However, during the routine course of inspection and based on observations, the exchanges have issued advise letters or levied minor penalties on
Elara Securities (India) Private Limited for minor operational deviations in certain cases. Elara Securities (India) Private Limited has not been debarred from doing
business by any Stock Exchange / SEBI or any other authorities; nor has the certificate of registration been cancelled by SEBI at any point of time.
Elara Securities (India) Private Limited offers research services primarily to institutional investors and their employees, directors, fund managers, advisors who are
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Details of Associates of Elara Securities (India) Private Limited are available on group company website www.elaracapital.com
Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.
Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial interest
in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial ownership of
1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara Securities (India)
Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date
of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or more securities of the
subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relative or Elara Securities
(India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the Research Report.
Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.
Research analyst or Elara Securities (India) Private Limited have not received any compensation from the subject company in the past twelve months. Associate
entities of Elara Securities (India) Private Limited may have received compensation from the subject company in the past twelve months. Research analyst or Elara
Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve
months. Research analyst or Elara Securities (India) Private Limited or its associates have not received any compensation for investment banking or merchant banking
or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities may
have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company or
third party in connection with the Research Report in the past twelve months.
40
Disclaimer for non U.S. Investors
The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we
endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation.

Disclosures for U.S. Investors
The research analyst did not receive compensation from JSW Steel Limited, Tata Steel Limited, Jindal Steel and Power Limited and Steel Authority of India Limited.
Elara Capital Inc.’s affiliate did not manage an offering for JSW Steel Limited, Tata Steel Limited, Jindal Steel and Power Limited and Steel Authority of India Limited.
Elara Capital Inc.’s affiliate did not receive compensation from JSW Steel Limited, Tata Steel Limited, Jindal Steel and Power Limited and Steel Authority of India
Limited in the last 12 months.
Elara Capital Inc.’s affiliate does not expect to receive compensation from JSW Steel Limited, Tata Steel Limited, Jindal Steel and Power Limited and Steel Authority
of India Limited in the next 3 months.
Disclaimer for U.S. Investors
This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it
should not be relied upon as such.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or
strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice,
and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the
interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please
note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a
different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that
investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment
decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of
particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable
for your particular circumstances and, if necessary, seek professional advice.
Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not
guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future
performance could differ materially from these “forward-looking statements” and financial information.
41
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Ferrous Metals - Elara Securities - 20 January 2021

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Ferrous Metals - Elara Securities - 20 January 2021

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Ravi Sodah

in the auto industry. 40,000

Attractive proposition: firm input expenses to keep prices elevated 30,000

Early economy cycle play: top pick is Tata Steel 5,800

preferred pick in the ferrous metal space. Tata Steel’s focus on

Ravi Sodah • ravi.sodah@elaracapital.com • +91 22 6164 8517

Going local ……………………………………………………………………………………………………….. 5

Attractive proposition …………………………………………………………………………………….. 10

Early economy cycle play ………………………………………………………………………………. 14

2 Elara Securities (India) Private Limited

Source: World Steel Association, Bloomberg, Elara Securities Estimate

Elara Securities (India) Private Limited 3

0 additional ~3mn tonne and ~6mn tonne, respectively, is

Exhibit 4: China’s Jan-November crude steel

Exhibit 6: World steel capacity to expand 2.5% to 3.3% by CY22E

4 Elara Securities (India) Private Limited

price (MIP). Therefore, we expect domestic steel demand to 800

Demand YoY growth

Source: Steel.gov.in, Elara Securities Estimate

Elara Securities (India) Private Limited 5

Construction, infra: govt’s strong push to lift demand

10 CRISIL, construction accounts for 35-40% of domestic steel

demand led by focus on rural development & good

Construction of 65,000km of road with total outlay of INR

INR 815bn planned construction capex in two freight

6 Elara Securities (India) Private Limited

followed by ~36% YoY and ~19% YoY growth in FY22E

Production Domestic sales Exports

Apart from construction, infrastructure and autos;

Elara Securities (India) Private Limited 7

Source: CMIE, Elara Securities Research 4

Buoyant exports emerges as savior during lockdown 3

8 Elara Securities (India) Private Limited

Exhibit 19: Utilization is likely to reach ~80% in FY23E

Elara Securities (India) Private Limited 9

10 Elara Securities (India) Private Limited

4,800 imports from Australia since mid-October have resulted in

coal under pressure in the near term.

Elara Securities (India) Private Limited 11

12 Elara Securities (India) Private Limited

60,000 Strong uptick in steel demand and High global prices

Source: CRISIL, Elara Securities Research

Exhibit 28: Finished steel inventory at two-year lows

Source: CMIE, Elara Securities Research

Elara Securities (India) Private Limited 13

Early economy cycle play

Post WTC slowdown, Post Lehman crash Mcap

Source: IMF, CMIE, Elara Securities Research

Excess total returns over NIFTY World GDP growth

Source: IMF, CMIE, Elara Securities Research

Averge P/BV Wold GDP growth (RHS)

Source: IMF, CMIE, Elara Securities Research

14 Elara Securities (India) Private Limited

Key risks Macro favorable for integrated firms

Elara Securities (India) Private Limited 15

Exhibit 32: Valuation charts

16 Elara Securities (India) Private Limited

operations, which were drag to overall profitability, are likely to 150

turnaround in FY22. Increase in backward integration is also 100

Ravi Sodah • ravi.sodah@elaracapital.com • +91 22 6164 8517

Valuation trigger Investment summary

exports portfolio to offset any

EV/EBITDA valuation overview

 Volume CAGR of ~9% over