Recent Rupee appreciation, if sustained, could hurt Ebitda of our covered steel/metal cos. (ex Coal India). For steel cos. stronger Rupee could cap domestic steel prices and increase downside risk. Among our non ferrous cos., Hindalco is exposed, though higher spot Al LME may offset this. Coal India is insulated. Stronger Rupee could lower net debt due to translation gains, but net valuation impact at `65/$ would likely be negative for most of our covered cos.
Stronger Rupee could cap domestic steel prices: Regional steel prices are down 7% from peak and Rupee is up 4.6% YTD CY17. Domestic HRC ex mill prices (`35,000/ton) are now in line with import parity vs. 7% discount in Feb. With strong export bookings in March and with domestic steel prices at a discount to import parity, domestic steel mills have been trying to push through price hikes in past few weeks, but with domestic prices now near import parity, we see limited headroom to hike prices, if Rupee stays near spot. Further fall in regional steel prices could push domestic steel prices lower.
Stronger Rupee could reduce export attractiveness: With supply outpacing domestic demand, domestic steel mills have boosted exports (+77% y-o-y YTD FY17), but at spot Rupee and regional steel prices, estimated export net back ASP would be at an 8-10% discount to domestic realisation (0-4% discount in Jan-Feb). This could prompt mills to sell more tonnages in the domestic market. Markets expect anti-dumping duty (ADD) to support domestic steel prices, even if regional steel prices correct, but if spot Rupee sustains ADD based import parity would be lower at `31,900/ ton, 9% below spot.
FY18e Ebitda sensitivity highest for SAIL: Within our covered steel cos., Ebitda sensitivity to 1% INR change is highest for SAIL, followed by JSW and Tata Steel. Stronger INR would reduce debt at companies having Fx debt due to translation impact.
Net impact on valuation could still be negative: Our current forecasts factor Rupee at 68/Dollar. Assuming Fx at 65 Rupee, we estimate FY18e Ebitda across covered metal companies (ex CIL) could be lower by 9-50% (SAIL), other assumptions remaining the same. After factoring net debt due to translation, estimated valuation impact could still be negative across our covered metal/steel names.