Amit Murarka of Motilal Oswal Financial Services says: “The domestic steel price now is almost at the pre-Covid level and the soft input price will support the profitability of steel players, even though demand is still to touch the pre-Covid level.” Tata Steel
and JSPL are top picks of Murarka; Credit Suisse, too, prefers Tata Steel
: It has continued to post improved performance, led by expansions, operating leverage, and iron-ore inventory from its Sarda mines, coupled with the softness in the coal price. The improved cash flows have helped reduce debt. Despite lockdown
disruption, JSPL’s net debt reduced by Rs 1,300 crore to Rs 34,621 crore at end of June, from Rs 35,919 crore in March 2020 . The expected divestment of Oman steel assets — to be completed soon — should help cut net debt further by Rs 6,000-6,500 crore (17 per cent) and reduce the net debt-to-Ebitda ratio to 3.4 times, from 3.9 times for FY21, say analysts at Kotak Institutional Equities, who feel this will easae concerns on lumpy debt repayments in FY21.
JSW Steel: The company is more dependent on external raw material supplies and should see higher benefits of lower raw material prices. Improving realisations will also boost prospects. With production having been ramped up to the pre-Covid level (90 per cent capacity utilisation), analysts expect volume growth to normalise in the next nine months of FY21. Further, its investments in slurry pipelines and railheads should reduce logistics costs and improve profitability – which is among the key reasons for investing in the stock, according to foreign research house Nomura, which expects 380 per cent rebound in earnings during FY22.
: It is an integrated player, which is now focusing more on Indian operations. As improving fundamentals in India steel business bode well, cheaper raw materials should push up the profitability of acquisitions (Tata Steel
BSL), too, which have been surprising with better-than-expected per tonne profitability during last two quarters. The European operations, too, posted better-than-expected results in the March quarter. While the success of ongoing restructuring attempts holds the key for a complete turnaround of European operations, an uptick in Europe’s economy and the lower coal price should help Tata Steel Europe. “It is our preferred pick in the ferrous space, owing to the potential for earnings improvement in domestic, as well as overseas operations,” say analysts at Edelweiss who have a target price of Rs 450 for the stock trading at Rs 402.
: This company, too, has been surprising positively on volumes, helped by higher exports. It should also benefit further from improving realisations. While higher demand from the Railways should keep its long products' realisations firm (higher as compared to peers), SAIL
is expected to benefit from government capex from the second half of 2020-21. Analysts at Emkay Global say they expect a sequential improvement in profitability as earnings bottomed out in the June quarter and valuation of 5.2 times and 4.8 times FY22 and FY23 enterprise value-to-Ebitda estimate, respectively, is undemanding.