Relative value

　　Tata Steel bonds are up 8-10 points this year, while JSW is higher by almost15 points. These numbers look stellar on the face, but are in line with globalHY steel bonds (Figure 1). The broad rally has been driven by their higher betanature and recovery in steel prices, which more than offset negative ratingactions. Tata Steel continues to trade at the tight end of the BB-rated compsand JSW is still at the wide end (Figure 2). We retain our Sell on Tata 2020s,and Hold on Tata 2024s and JSW 2019s. Just on the Tata curve, 2024s havemaintained their spread gap with 2020s at around 180bp (tight was 55bp inJuly 2015) and we find them offering relatively better value (Figure 3). Evenbetween Tata and JSW, we think JSW looks comparatively more attractive atabout 390bp additional spread (Figure 4).

　　What’s next for Indian steel companies

　　Both JSW & Tata reported strong 4QFY16 results. However, it’s interestingthat the last quarter reflected only a portion of the steel price increase that hashappened since Feb. This combined with the fact that volumes will be higherfrom increased production, leads us to believe that June quarter results willalso be quite solid. The companies are at the end of their capex cycle, implyingleverage should keep declining, albeit JSW has bumped up its capex guidancea little bit. Having said all this, we do caveat that China steel prices havestarted declining again and are well off the peak. Though India hasimplemented MIP (Minimum Import Price) and is studying anti-dumpingduties, the MIP expires in August. Separately, we are watching theimplementation of the new IND-AS (Indian Accounting Standards) designed toget closer to IFRS, but could lead to a jump in reported debt numbers for someIndian corporates. We don’t however expect this by itself to lead to negativerating actions.

　　Key upside & downside risks

　　Other than risks pertaining to the industry from higher/lower steel prices(discussed above), we discuss some name specific ones – key downside riskfor JSW is a successful bid for Tata Steel UK’s assets, while upside risk ischange in outlook from negative to stable by rating agencies. For Tata, keyupside risk is further asset sales.