India’s steel companies are currently in a strong position within the global metals industry, according to a report by global brokerage firm Nomura. The report highlights that Indian steel producers have lower production costs compared to global averages, especially due to cheaper labor. Even companies that don’t own their own iron ore mines in India still enjoy lower costs for raw materials than steel producers in other countries.
Nomura believes that the next wave of growth for India’s major steel companies will come from expanding existing facilities (brownfield expansion), which should lead to higher returns on capital. Additionally, strong domestic demand for steel will reduce the industry’s dependence on exports. From 2019 to 2023, India’s steel production grew by 6% annually, much faster than China’s 1% and the rest of the world’s 1% decline.
Steel Stocks to Watch
Nomura has begun tracking JSW Steel and has given the stock a ‘Buy’ rating, setting a target price of ₹1,220. This suggests a potential 22% increase from its September 27 price of ₹1,002. Similarly, the firm also rated Jindal Steel and Power as a ‘Buy’ with a target price of ₹1,200, indicating a potential rise of 17% from its September 27 price of ₹1,028.
Both JSW Steel and Jindal Steel and Power are reducing debt even during tough economic times, which should lower their borrowing costs as their financial risk decreases, according to Nomura. The company’s positive outlook for these stocks is based on their growing capacity and better integration of raw materials.
Valuation Outlook
Between FY12 and FY24, the one-year forward EV/EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) ratio for JSW Steel and Jindal Steel and Power ranged from 4.0x to 10.0x, with a median multiple of 6.5x. The companies’ median EBITDA per tonne during this period was around ₹8,000 to ₹10,000. However, Nomura believes that both companies have improved their mid-cycle earnings due to stronger domestic demand, cost-saving measures, and increased efficiency. As a result, they expect the new steady-state EBITDA to be around ₹11,000 to ₹12,000 per tonne, with the mid-cycle multiple rising to 7.5x.
On Friday, JSW Steel shares were trading 0.73% higher at ₹1,047.40, while Jindal Steel & Power shares were slightly down by 0.51% at ₹1,045.30.
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