India’s steel companies hold a favourable position in the global metals sector, said global brokerage firm, Nomura in its recent report. The brokerage noted that major steel producers in India operate with lower costs compared to global averages, mainly due to reduced labour expenses. Even non-integrated players in India have lower iron ore costs compared to those in other countries. The major Indian players have significant brownfield potential, and the brokerage foresees that the next phase of expansion will prioritise brownfield development, resulting in higher incremental ROCE.
Strong domestic demand should also lessen reliance on exports. During the course of CY19–23, India’s steel output grew at a 6% CAGR, compared to barely 1% for China and -1% for the ROW.
“We believe Indian steel majors are among the best-placed producers globally,” said Nomura in its report.
Metal Stocks in Focus
The brokerage house has initiated coverage on JSW Steel and given it a ‘buy’ rating, with a target price of ₹1,220, implying a potential upside of 22% from the September 27 price of ₹1,002. In addition, Nomura has also started covering Jindal Steel and Power, rating it as a ‘buy’ and setting a target price of ₹1,200, indicating a potential upside of 17% from the September 27 price of ₹1,028.
Nomura indicated that JSW Steel Ltd and Jindal Steel and Power Ltd are gradually moving towards an optimal capital structure by consistently lowering debt, even in times of economic decline. This is anticipated to lower the cost of capital as the risk of default diminishes.
Valuation to remain higher than historical range
From FY12 to FY24, the one-year forward EV/EBITDA for JSW Steel and Jindal Steel and Power fluctuated between 4.0x and 10.0x, with a median multiple of 6.5x. Throughout this period, the median or mid-cycle EBIDTA/t for JSW Steel and Jindal Steel and Power ranged from ₹8,000 to ₹10,000/t.
“However, we believe the mid-cycle earnings of JSW Steel and Jindal Steel and Power have structurally improved on account of stronger domestic demand, cost saving measures and improved efficiency. As a result, we expect ₹11,000-12,000/t to be the new steady state EBITDA for these companies, and believe 7.5x to be the new mid-cycle multiple for these companies,” said Nomura.
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