From JSW to SAIL, major steel companies' stocks show strong upside

Domestic demand recovery remains healthy, led by the auto sector and government infra pipeline
Stocks of all major steel companies surged 3-5 per cent on Tuesday on expectations of further increase in prices. As a result, the Nifty Metal index, up 2.8 per cent at 3,963, was among top sectoral gainers. Amongst individual constituents of the metal index, MOIL, NMDC, JSW Steel, Jindal Steel & Power (JSPL), and Tata Steel jumped between 4.3 per cent and 13 per cent.

Over the past three months, too, the Nifty Metal index has outperformed, gaining 21.8 per cent, compared with 6.2 per cent rise in the Nifty50. Domestic demand recovery remains healthy, led by the auto sector and government infra pipeline. Besides, realisations remain high with price hikes (amid tight supply and high raw material costs), robust domestic demand and high international prices.

“The Indian steel sector has rebounded strongly… with JSW Steel and Tata Steel India businesses reporting the highest ever quarterly Ebitda in Q3FY21,” said Amit Rustagi and Rwibhu Aon, analysts at UBS Securities India, in a report dated March 17. 

UBS is not alone. In their March 23/24 reports, analysts at Morgan Stanley and Edelweiss Securities too shared the bullishness.

“Strong rebound in demand plus supply-side reforms in China should lead to higher international steel prices. We see super-cycle profitability being sustained for a longer period with accelerated de-leveraging and potential start of new capex cycle,” note Gaurav Rateria and Mukund Sarawogi of Morgan Stanley. They prefer Tata Steel and JSPL, and have upgraded JSW Steel to overweight.

We expect global steel prices to stay firm in the near term, say Amit Dixit and Meera Midha of Edelweiss Securities. “In the Indian context, we expect steel prices to follow the global price uptick,” they note. 

Global and domestic hot-rolled coil (HRC) prices have risen about 60-70 per cent in the past 10 months. 

Given strong fundamental view, here are the prospects for top stocks:

Tata Steel: Prudent spending on capex and focus on cost efficiency helped it post operating profit per tonne of Rs 20,000 in Q3. UBS Securities says it estimates FY22 standalone margins to be at Rs 19,000 per tonne level and 100 per cent captive iron ore aids margins, which is under-appreciated by the market.

Technicals (short-term trend): A strong reversal nearing the 50-day moving average and a close above Rs 760-mark has given an upside breakout. Stock is heading towards Rs 850 in near term. The imme­diate closing basis support comes at Rs 760.

JSW Steel: Expanded capacities, increasing value-addition and better sourcing of iron ore will drive earnings. Analysts say the Street is not fully factoring in these improvements, which could drive re-rating.

Technicals: After a breakout above the resistance of Rs 430, the stock has re-tested its support levels during the recent market correction. Till the stock defends Rs 450 levels, the upside bias may see a rally towards Rs 500.

JSPL: Relatively cheaper valuations and significant de-leveraging of balance sheet are among key positives. Analysts estimate JSPL’s steel volumes to grow over six per cent in the next two years. These, along with higher prices will drive earnings during FY21-23.

Technicals: The stock has broken above the “falling channel pattern” at Rs 420, supported by heavy volume. It now needs to conquer Rs 345-mark to move towards Rs 360.

SAIL: Though Morgan Stanley has cut its rating from overweight to equal weight even as it raised the target price from Rs 75 to Rs 87, analysts at Motilal Oswal Securities see SAIL as the best play on higher steel prices, given its backward integration, higher operating leverage, and higher financial leverage. 

Technicals: A sustained move above Rs 80-mark may provide medium-term breakout towards Rs 100 and Rs 120. Positive crossover of 50-WMA and the 100-WMA further confirms upside bias on the breakout.

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