Street Sees Limited Relief As Govt Moves To Curb Inflation


The central government cut the excise levy on auto fuels, slapped an export duty on iron ore and other steel intermediates, and reduced duty on inputs for steel and petrochemicals to improve their local availability.

The measures, however, do not bode well for companies in these sectors, with BSE metals and oil and gas indices falling the most on Monday while the auto index gained the most. The Sensex and Nifty declined 0.07% and 0.32%.

Export duties on iron ore and some steel intermediates spooked steelmakers since their profits will take a hit both in domestic and export markets.

According to analysts at Kotak Institutional Equities, the 15% export duty on steel should bring down domestic steel prices by 8-10%.

Factoring in lower steel and iron ore prices, Kotak has cut its Ebitda/tonne estimate by 20-35% for steel companies and 24-33% for iron ore explorer NMDC Ltd for FY2023-24.

Top steelmakers such as Tata Steel, JSW Steel and SAIL saw shares fall over 10% on Monday. Analysts at ICICI Securities said, “ 5,000-7,000/tonne of impact on Ebitda is very much possible on integrated steel players, while for unintegrated steel equities like JSW Steel, the impact can be approximately 5,000/tonne.”

Analysts at Motilal Oswal Financial Services Ltd (MOFSL) said the government measures did not address international coking coal prices that remain elevated. They also do not expect steel users such as automakers, real estate developers and infrastructure companies to pass on the benefit to end consumers.

A.K. Prabhakar, head of research at IDBI Capital, said though measures can help reduce inflation in the short term, the abrupt excise duty hike is not good as companies have committed to capex.

Analysts said the measure would have had a better impact a year ago when steel prices were at a similar level, but coal was about 20% cheaper and profitability at near peak. The industry then had the capacity to absorb the impact without sacrificing capex plans, which is not possible now, say analysts at MOFSL.

Meanwhile, the excise duty cut on petrol and diesel by 8 a litre and 6 a litre, respectively, is expected to lower retail fuel prices. “This 8% sequential decline in retail price is expected to immediately bring down headline CPI by ~20bp, but given that all of it won’t get reflected in May’s CPI, we retain our 6.7% inflation forecast for May,” said BofA Securities.

Analysts at Jefferies India Pvt. Ltd said that a steep 29% cut in fuel taxes coupled with lower surplus payment from the Reserve Bank of India would likely raise concerns on fiscal deficit, though near-term inflation gets a reprieve. Complete pass-on of duties is a negative for oil marketers such as HPCL and BPCL, according to them.

Oil marketing companies are also seeing earnings downgrades, and analysts at Prabhudas Lilladher have cut FY23 earnings of HPCL/BPCL by 56-40%, as OMCs’ ability to reduce high marketing losses of 6 and 10 per litre for Q1FY23 on petrol and diesel will depend on crude price correction.

To be sure, cheaper fuel and steel can be positive for automobile manufacturers that have seen high ownership costs impacting sales. Mitul Shah, head of research at Reliance Securities, said the automobile sector, which continues to face commodity cost pressures, stands to benefit from the levy of export duties on steel and reduction of taxes on imports as this could lead to moderation in domestic input prices. However, inflation may still remain above RBI’s desired upper limit of 6% for the fiscal, he said.

According to Soumitra Bhattacharya, president and managing director, Bosch India, “While the RBI has made a very brave and good move of the 40 bps hike in lending rate and the CRR increase of 50 bps to contain inflation, inflation is likely to increase, and this inflationary pressure will keep on being passed down, and the consumer will have to bear it.”

Yet, these announcements are unlikely to derail the RBI’s rate hike path. “As outlined, the benchmark repo rate will be taken to the pre-pandemic level of 5.15% by a 50 basis points hike in June and +25bp in August,” said DBS Macro insight weekly note.


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