Steel Stocks May Fall As Much As 38% On Valuation Concerns, Says Morgan Stanley
Shares of Indian steel manufacturers such as Tata Steel Ltd., JSW Steel Ltd., Steel Authority of India Ltd. and Jindal Steel Powers Ltd. may correct by 17% to 38% due to unattractive valuations, according to Morgan Stanley.
Steel stocks have rallied by over 21% in the last six months outperforming the benchmark BSE Sensex by 10 percentage points. This was mainly due to better macro sentiment in China and expectations of policy continuity under Modi 3.0, Morgan Stanley said.
However, with no material improvement in inventory levels and spreads, and hence profitability, the brokerage believes this outperformance is overdone.
Thus a correction in share prices is expected despite the underperformance by the steel companies last week, the brokerage said. That is because the current valuation is almost double to the 10 years mean.
"Although the stocks underperformed this week, current valuation at about two times (on an one-year forward price-to-book ratio basis) is still much higher versus the 10-year mean of about 1.1 times and looks unattractive," Morgan Stanley said in a note.
Hence, the brokerage expects a de-rating over the coming months.
Key Upside Risks
Jindal Steel and Power: Faster-than-expected improvement in global macro environment, pickup in exports
JSW Steel: Domestic demand and company volumes growing ahead of expectations, faster project ramp-up
Steel Authority of India: Higher than expected domestic steel prices, domestic demand and company volumes growing ahead of expectations
Tata Steel: Improvement in Indian steel demand growth, recovery in steel prices, faster than expected growth in macro environment
Key Downside Risks
Jindal Steel and Power: Slower domestic steel volume growth, weaker than expected profitability on weaker steel prices and higher costs
JSW Steel: Weaker then expected prices or volumes, delay in new capacity commissioning
Steel Authority of India: Weaker than expected prices or volumes, faster than expected earnings deterioration
Tata Steel: Sharp correction in international steel prices, deeper than expected losses in Europe
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