Steel Stocks Set For A Promising New Year, Says Morgan Stanley; Jindal Steel, JSW Steel Top Picks

Indian steel stocks are expected to do well in 2025 as it sees green shoots for spreads expansion in the new year with inventory de-stocking starting, improved demand outlook over the next few months and normalised imports, according to Morgan Stanley.

The brokerage expects select steel stocks to do well in 2025, preferring companies with better growth and margin profiles. It has maintained 'overweight' on Jindal Steel & Power Ltd. and JSW Steel Ltd.

It said Jindal Steel, on which it has a target of Rs 1,200, has strong capacity expansion plans, which should help drive strong volume growth and, hence, market share gains over the medium term. "Also, various backward integration initiatives should provide margin expansion potential," it said. "Moreover, the balance sheet has improved significantly over the past few years, help further by divestment of the power business."

On JSW Steel, it has a target of Rs 1,150, and said capacity ramp-up and new capacity expansion should help drive strong volume growth and, hence, market share gains. "This should lead to better-than-peers EBITDA performance for JSW Steel," it said.

Last year, India steel stocks did well in pockets, helped first by expectations of continuity in policy reforms under Modi 3.0 post general elections, and then by some stimulus announcements in China in September, it said. "However, relatively weak demand in India during 1H-F25 (first half of FY25), and no material follow-up to the stimulus announcements in China drove some profit booking for steel names, we believe," Morgan Stanley said, noting that its coverage is now up 14% year-to-date on a weighted average basis, broadly similar to Sensex.

"With demand momentum expected to pick up from hereon, and China Politburo signalling further stimulus support, we see de-risking of some of the concerns ailing India's steel industry over the past couple of years," it said. "As demand picks up, we expect domestic steel prices to move up — note, domestic steel prices premium vs. import parity prices has narrowed to ~4% vs. ~8-9% premium over the past year."

"For the industry, the brokerage has built in 7% demand growth for fiscal 2026, after 12% annual growth during FY22-25, and there could be upside risk if demand momentum surprises positively," Morgan Stanley said.

It is 'equalweight' on Tata Steel, which has done well in improving its share of domestic business, and the balance sheet has strengthened over the past few years. "However, profitability on a relative basis is likely to struggle given our expectation that growth will lag peers."

On Steel Authority Of India Ltd., it said the company has the lowest profitability in steel coverage on a per tonne basis given its high cost structure. "During times of compression in spreads, SAIL is affected more than peers," it said.