Steel prices have soared internationally and domestic demand seems robust. Global brokerage firms Morgan Stanley and UBS have joined India’s big bull Rakesh Jhunjhunwala in going bullish on steel stocks on the back of improving commodity cycle. Steel prices have soared internationally, and domestic demand seems robust. Morgan Stanley and UBS said in recent notes that they see healthy demand going forward for steel which could help ease concerns for steel stocks. “We see supercycle profitability being sustained for a longer period with accelerated de-leveraging and the potential start of new Capex cycle,” Morgan Stanley said.
Commodity cycle gaining momentum
UBS highlighted that the steel sector has rebounded strongly from COVID-19 disruption, with JSW Steel and TATA Steel reporting the highest ever quarterly EBITDA in the December quarter. “Domestic demand recovery is led by the auto sector and government infra pipeline, and we expect vaccinations to sustain the recovery. Steel realisations remain high with price hikes, robust domestic demand and high international prices,” they added.
India’s steel industry could also benefit from China’s new reforms which seek to take the country on the path of carbon neutrality by 2060. “Our China Materials team believe this will lead to an upward trend in the cost curve and supply disruption for heavy power-consuming and high-emission industries such as steel and aluminium, driving more upside potential to these commodity prices,” Morgan Stanley noted. The note added that the upcycle in India’s steel industry could last till 2023. “We expect this cycle to be bigger and stronger than the previous cycle, backed by strong demand and tight supply,” they added.
Stock picks
Tata Steel
UBS target – Rs 900
Morgan Stanley target – Rs 1,000
Tata Steel is Morgan Stanely top pick among the steel stocks. Morgan Stanley believes Tata Steel will not only benefit from the industry upcycle but this would help the company deleverage its balance sheet ahead of commitments. Analysts at UBS said they find management’s focus on curtailing Capex, project rationalisation, cost management and efficiency improvements in a challenging FY21 to be key positives.
JSW Steel
UBS – Rs 500
Morgan Stanley – Rs 590
The stock has been upgraded by Morgan Stanley given the strongest volume growth, weakening iron ore prices and solid earnings CAGR. The brokerage also believes JSW Steel to be the best play on strong earnings. Cash flows are expected to improve materially from FY22 onward, driving net debt lower. UBS finds the stock to be a pure-play on India exposure. “While much of the capacity expansion appears to be priced in, we think investors are overlooking JSW’s margin improvement initiatives,” UBS said.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)
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