Deutsche Bank & CLSA to see good days
Leading brokerages CLSA and Deutsche Bank see good days for steel sector going ahead owing to a combination of factors such as improvement in asset utilisation, regulatory support against imports and improving cash flows.
Deutsche Bank expects return on equity of the steel sector to improve by 600 basis points between FY17 and FY19, and it has raised target prices on Tata Steel, JSW Steel, Steel Authority of India and Jindal Steel by 5-28%.
“Utilisation rates for Indian steel rose 430 bps to 78% in FY17 the sharpest YoY (year-onyear) improvement in the past decade. We expect this momentum to continue in FY18 with utilisation rates rising by 433 bps YoY to a seven-year high of 82.4%,“ said Deutsche.
Hong Kong-headquartered CLSA sees overall improvement on the capital expenditure front in the metals space in FY19 and expects aggregate annual sector capex to rise to $8 billion by FY20 from about $4.7 billion in FY18.
Companies are regaining con fidence to invest again with focus on projects that can give high return on capital employed, CLSA said. The brokerage added that while non-ferrous companies such as Hindalco, Vedanta and Nalco have firmed up growth plans, steel firms’ capex should also start soon.
“India will need to start construction of 5-6 mt of steel capacity each year starting FY18. With their relatively better balance sheets, Tata and JSW are likely to be the main companies driving this investment.”
For Deutsche, JSW Steel remains a preferred pick in the metals space due to high visibility of earnings thanks to ramping up of new commissioned capacity and improving product mix.JSW is also the only company on which it has put a ‘buy’ rating.
On Tata Steel, the brokerage has maintained a `hold’ rating as it seeks more clarity on resolution of the pension fund deficit.Deutsche has maintained ‘hold’ on Jindal Steel as well. While Jindal Steel will benefit from government’s focus on infrastructure and rising volumes, the stock is fully valued.