Steel Stocks Surge on Global Optimism and Deleveraging Boost

Early trading on October 3 saw a 1-3 % increase in the shares of steelmakers JSW Steel, Tata Steel, and Jindal Steel and Power due to positive outlooks for the industry provided by a few international brokerages. Nifty Metal, which gained 0.6 %, was the best-performing sectors index as a result of increases in these equities.

Amid hopes that China's recent economic stimulus will generate a favorable feeling toward steel and sustain its pricing, brokerage company Morgan Stanley raised both its rating and price targets for three steel-producing businesses.

In the near term, spreads should be further supported by the brokerage's perception of a decreased risk associated with imports. Morgan Stanley also increased its forecasts for the steelmakers, believing that the equities would perform strongly in the upcoming months.

Nomura, which believes that Indian steel businesses are in a favorable position within the global metals industry, has joined Morgan Stanley. The brokerage stated that Indian steel majors would continue to be supported by continued deleveraging and growing domestic demand, particularly from the automotive industry.

Nomura also pointed out that businesses like JSW and JSPL are gradually reaching an ideal capital structure through continuous deleveraging initiatives, even in recessions. The brokerage expects this strategic step to lower their cost of capital as the default risk decreases.

In the past, the industry's high debt levels have inflated the cost of shares. But Nomura expects that the market risk premiums and reduced risk-free rates that are already present, together with industry-specific adjustments like deleveraging, would result in a decline in the cost of equity for these businesses. After factoring in the excitement around these events, Nomura started covering Jindal Steel and Power and JSW Steel. They were given a "buy" rating with price targets of ₹ 1,200 and 1,220, respectively, indicating potential upside of 17 and 22 %. Morgan Stanley also upgraded the ratings and set price targets for Jindal Steel, JSW Steel, and Tata Steel. 

Along with a 24 % and 28.5 % increase in their price estimates to ₹ 1,200 and ₹ 1,150, respectively, JSPL and JSW Steel were upgraded to a 'overweight' call.

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Tata Steel's price objective was increased by about 30% to ₹ 175 and the company was also upgraded to a "equal-weight" call. However, Morgan Stanley increased its price objective for Steel Authority of India by 20% to ₹ 125, even as it kept its 'underweight' call on the company.

To Summarize

Steelmaker stocks like JSW Steel, Tata Steel, and Jindal Steel & Power saw a 1-3% rise in early trading on October 3, driven by positive industry outlooks from international brokerages. Nifty Metal also performed well, rising 0.6%. Morgan Stanley upgraded its ratings and price targets for these steel companies, citing China's economic stimulus as a factor that may support steel prices. Nomura echoed this optimism, highlighting deleveraging efforts by Indian steelmakers, which could reduce their cost of capital and improve equity performance. Both brokerages issued "buy" ratings with significant price target increases for JSPL, JSW Steel, and Tata Steel, projecting potential gains of 17-30%.