Underperform Maintained on CSN

We recently maintained an Underperform recommendation on Brazil-based Companhia Siderurgica Nacional (SID - Analyst Report), or CSN.

Companhia Siderurgica produces hot- and cold-rolled flat steel, galvanized sheets, and tin plates for the packaging, automotive, and construction industries. Over the long term, the growth prospects of CSN appear to be encouraging, considering the various projects that are being carried out by the company and the escalating trends of the global steel demand.

According to the World Steel Association, steel demand will rise by 6% worldwide both in 2011 and 2012, attributed to the reviving global economy, increasing private and public capital spending, falling unemployment levels and growth of the emerging economies. Further, the outlook for the Brazilian steel industry also looks favorable with the growth in manufacturing and construction industries. The forthcoming 2014 Soccer World Cup and 2016 Olympic games, to be held in Brazil, have also boosted the company’s growth prospects considerably.

Moreover, CSN’s entrance into the cement business seems to be an added advantage. The acquisition of the Spanish and German assets will enable CSN to diversify its mining, cement and logistics businesses.

Despite these positives, the growth momentum gets restricted due to mounting manufacturing costs. In the first quarter of 2011, cost of goods sold went up 25.4% year over year, leading to a 3% decline in gross margin.

In addition, CSN’s debt levels are escalating; ascribed primarily to funding the company’s investment plans. Moreover, high cyclicality and growing competition in the industry are major hindrances to growth. The company faces stiff competition from Ternium SA-ADR (TX - Snapshot Report) and Usiminas SA-ADR (USNZY), among others.

Read the full analyst report on SID

Read the full analyst report on TX

Read the full analyst report on USNZY