Global brokerage firms Morgan Stanley and UBS have joined India’s significant bull Rakesh Jhunjhunwala in going bullish on steel stocks on the back of enhancing commodity cycle. Steel costs have soared internationally, and domestic demand appears robust. Morgan Stanley and UBS stated in current notes that they see healthier demand going forward for steel which could enable ease issues 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 stated.
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 business could also advantage from China’s new reforms which seek to take the nation 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 business could final 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 prime choose amongst the steel stocks. Morgan Stanley believes Tata Steel will not only advantage from the business upcycle but this would enable the business deleverage its balance sheet ahead of commitments. Analysts at UBS stated they uncover management’s concentrate on curtailing Capex, project rationalisation, expense management and efficiency improvements in a difficult FY21 to be essential positives.
JSW Steel
UBS – Rs 500
Morgan Stanley – Rs 590
The stock has been upgraded by Morgan Stanley provided the strongest volume development, weakening iron ore costs and strong earnings CAGR. The brokerage also believes JSW Steel to be the finest play on robust earnings. Cash flows are anticipated to boost materially from FY22 onward, driving net debt reduced. 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 stated.
(The stock suggestions in this story are by the respective investigation and brokerage firms. TheSpuzz Online does not bear any duty for their investment suggestions. Please seek the advice of your investment advisor ahead of investing.)