Morgan Stanley on India Steel: Moving Towards a Sweet Spot; Remain Positive

India Steel: Moving Towards a Sweet Spot; Remain Positive
Despite the group’s recent run-up, we think the
stocks are still not reflecting fundamental positives:
We cite growth opportunities, sustainable transformation
of costs and quality, and the growing probability of
improvement in these companies’ balance sheets. Tata
Steel, JSW Steel, and SAIL (all OW, in descending order
of attractiveness) offer good entry points from a
one-year perspective, in our view.
Confusion on steel prices abounds … Apart from
depressing the valuation multiples that the market is
prepared to assign, this confusion is also having a
negative impact on Street earnings expectations. We
are 7-46% higher than consensus earnings expectations
for F2012 and expect upgrades on the Street in C1H11.
… but we expect steel prices to inch up in the next
four to six quarters: This is a key differentiating factor
for our call – market views are scattered from extreme
pessimism to confusion. We raise our Indian steel price
assumptions by 5% each for F2011-12 and 6% for F13.
Tata, JSW, and SAIL are nearing significant
milestones in growth or in sustainability: We think
the market should increasingly recognize these
milestones in the next 12 months.
Valuations have upside – especially for Tata and
JSW: Investors fear deep and sustained losses from
Corus and poor profitability at JSW due to its low
self-sufficiency in raw materials. We expect these fears
to subside, however, with healthy results in the next
three to four quarters – allowing valuations to improve.
We adjust our PTs and EPS forecasts for Tata Steel,
JSW, and SAIL: We increase our steel price
assumptions, pushing up our EBITDA/ton projections.
For SAIL we curtail our production assumptions due to
which its EBITDA forecasts have reduced for F11-F13.
We also increase JSW’s and SAIL’s share count.