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    Time to buy steel stocks? Tata, Jindal and JSW get upgraded

    Synopsis

    Steel prices have firmed up on the back of these government measures and firm domestic demand.

    ET Bureau
    MUMBAI: The outlook for the Indian steel sector is bright with key brokerages hiking target price and upgrading stocks on the back of strong demand and rising prices.

    In the past few days, Morgan Stanley has upgraded the ratings of Jindal Steel to overweight from underweight and increased the target price to Rs 188 from Rs 174. It also upgraded the ratings of JSW Steel and Sail to equalweight from underweight and increased the target price of JSW Steel to Rs 296 from Rs 278 and Sail from Rs 53 to Rs 54. Goldman Sachs also upgraded the ratings of JSW Steel to buy from neutral with a target price of Rs 315.

    Analysts increasingly feel that large steel stocks currently trading at marginal discounts to long term average EV/EBITDA could be best bets. “Indian steel industry on the cusp of a multi-year run,” said Chetan Phalke, CIO – Alpha Invesco. “It’s a time to take a contrarian bet due to strong domestic steel prices, rising capacity utilizations, de-leveraging of the balance sheets and governments anti-dumping duties till 2022”.

    Jindal Steel & Power, Tata Steel, JSW Steel and Sail have underperformed the Sensex between 15 per cent and 50 per cent in the past one year. These stocks now trade between 5 and 6 times FY 2019 estimated EV/EBITDA as against the historical average of 7x.

    Steel snip 1

    Demand has been strong in India but production has been affected by sluggish exports. Rating agency ICRA said recently that Indian steel demand will grow at over 7 per cent while World Steel Association last year upped its 2019 India growth forecasts to 7.3 per cent from 6 per cent.

    Steel prices have firmed up on the back of these government measures and firm domestic demand while international prices too have recovered. Monthly production growth has accelerated in the last two months after a long stagnation.

    The favorable risk-reward scenario has prompted the upgrades, analysts said.

    “Demand recovery from recent lows and price rises led by global steel prices and domestic demand should support earnings growth for Indian steel companies and drive stock performance,” said Ashish Jain, equity analyst, Morgan Stanley India. “Stock valuations too are supportive, with large steel stocks now at marginal discounts to longterm average EV/EBITDA and a modest premium on price-to-book of 20 per cent now versus 50 per cent three months ago”.

    Domestic demand grew 7.5 per cent in December 2018 quarter and while it moderated in January 2019. Analysts expect demand recovery on the back of industrial capex and some pick up in consumption demand. The industry has raised steel prices by 4 per cent or Rs 1,500 per tonne in the past month. With Indian steel prices now at a marginal discount to the import parity price vs an 8 per cent premium in Nov-18, price risk is skewed to the upside, according to analysts.

    “We expect divergent near and medium term steel price trajectory in CY 2019 with an expected near term upswing led by higher iron-ore prices due to Vale disruption, restocking in China and strengthening CNY/US$,” said Abhishek Poddar, analyst, Kotak Securities.







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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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