Five Reasons HSBC Finds Indian Steel Stocks Attractive

Posted on 01 February 2018

Source: Bloomberg

India is on track to become the second largest producer after Japan in 2018, as well as the second largest steel consumer behind the U.S. by 2020.

That’s the word from HSBC Global research which expects the the recovery in the Indian steel sector, which started in the previous financial year after hitting a trough in FY16, to continue. The strength of Indian economy and the government’s infrastructure push to work in favour of the sector, the research firm said.

It’s optimism is based on an average 266 percent increase in stocks of steel companies in the last two years. Besides, data on demand, production and export front has been encouraging, HSBC said, “Demand is up 5.2 percent year-on-year production up 4.6 percent and exports surged 53 percent during April-December 2017.” The following five factors make India’s steel producers attractive for the research house:

  • Strong demand,
  • Improving utilisation levels,
  • Support from exports,
  • Downside risk mitigation via trade measures,
  • Cost advantage due to production from blast furnace.

HSBC forecasts revenue, operating income and net profit to rise at a compounded annual growth rate at an average 10 percent, 23 percent and 63 percent, respectively, for the standalone operations for Jindal Steel & Power Ltd., Tata Steel Ltd., JSW Steel Ltd. and Steel Authority of India Ltd., over the financial years through March 2020.

Stock Recommendations
The research firm maintained a ‘reduce’ rating on SAIL, it upgraded the rating of Jindal Steel & Power to ‘buy’ and continued to maintain its bullish view on Tata Steel and JSW Steel.

HSBC expects the new Angul plant to be a game changer for Jindal Steel & Power, helping it to boost profitability and lower debt. It expects Tata Steel and JSW Steel to enjoy relative balance sheet strength and strong project execution. The research firm assumes that SAIL has run ahead of fundamentals in the recent surge in its stock price.

A fall in demand and steel prices, lower-than-expected utilisation for the domestic or global steel industry are the key risks, HSBC cautioned. 

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