Morgan Stanley Expects Indian Steel Upcycle To Last Into FY23
A red hot steel slab passes along a rolling machine at the Steel Authority of India Ltd. Rourkela Steel Plant in Odisha. Photographer: Dhiraj Singh/Bloomberg

Morgan Stanley Expects Indian Steel Upcycle To Last Into FY23

Morgan Stanley expects the upcycle in India’s steel industry to last into the fiscal ending March 2023, supported by a strong pick-up in demand as well as supply-side reforms undertaken by China-related to reducing emissions.

“The current cycle has an element of similarity to both the prior upcycles (after global financial crisis 2009 and supply-side reforms during 2016-18). We see a sharp rebound in steel demand globally (rest of world ex-China) in 2021, supported by a V-Shaped economic recovery,” the investment banking company said in a report.

China’s emissions-related reforms, according to Morgan Stanley, will lead to production cuts and exports declining in 2021, which will create supply tightness in the seaborne market. It expects China’s crude steel production to decline 0.3-2.3% year-on-year in 2021, leading to a 30-50-million-tonne drop in exports during the period.

Implications for Indian steelmakers according to Morgan Stanley

  • A decline in steel exports from China helps reduce deflationary pressure on international steel prices.
  • International steel prices are currently at premiums to domestic prices, providing an opportunity for Indian producers to participate in export markets. India’s steel exports will stay elevated in 2021-22 as producers with excess capacity will fill the gap created by the decline in China exports. As a result, the supply situation in India is expected to remain tight.
  • Industry utilisation rates should improve faster; the volume growth outlook is robust. JSW Steel Ltd. is best positioned to deliver double-digit volume growth, while other larger players will likely run out of capacity.

“Higher international steel prices and tightness in supply in the domestic market should support supercycle profitability. This will lead to accelerated deleveraging and the potential start of a new capex cycle for India’s steel industry.” With greater visibility on a longer-term cycle, Morgan Stanley said there will be a shift in focus away from balance sheets to earnings growth.

Morgan Stanley upgraded JSW Steel owing to the strongest volume growth and a drop in iron ore prices supporting solid earnings growth. It downgraded Steel Authority of India Ltd. and advised investors to shift to JSW Steel incrementally with strength in the stock price due to potential price hikes. “Our order of preference is Tata Steel Ltd., JSW Steel and Jindal Steel & Power Ltd. within overweight stocks.”

Morgan Stanley has increased its FY22 realisation estimates by 1-12%, resulting in a rise in Ebitda estimates across its coverage by 4-35%. “We see scope for upside risks to our estimates and believe the earnings upgrade cycle is likely to continue.”

Still, higher-than-expected inflation driving up yields and constraining demand, limited supply disruptions in China and faster-than-expected normalisation of spreads are some of the key risks highlighted by the global financial services provider.

Here’s Morgan Stanley’s rationale for its preferred picks...

Tata Steel

  • Maintains ‘overweight’ rating and hikes price target to Rs 1,000 apiece from Rs 880.
  • Tata Steel is well placed in the current industry upcycle and with support from this cycle, the management is deleveraging the balance sheet ahead of its commitments.
  • Expects 4.3% volume CAGR and 2.1% realisation improvement over FY21-23 in India operations.
  • Estimates a consolidated Ebitda CAGR of 4% over FY21-23.

JSW Steel

  • Upgrades to ‘overweight’ from ‘equal-weight’ and hikes price target to Rs 590 apiece from Rs 425.
  • Expects Ebitda growth to be the best within the coverage universe.
  • Ebitda growth will be aided by 16% volume growth seen over FY21-23.
  • Cash flows should improve materially from FY22 onwards, driving net debt lower.
  • Expects net debt to decline to Rs 51,000 crore from Rs 61,400 crore in FY20, and net debt-to-Ebitda to improve to 1.7x in FY23.


  • Maintains ‘overweight’ rating and hikes price target to Rs 410 apiece from Rs 380.
  • Should be able to lower net debt to Rs 12,200 crore by FY23 from Rs 25,600 crore as of December 2020.
  • Lower debt may translate into net debt-to-Ebitda of 1x and net debt-to-equity of 0.2x, which will be materially better than previous cycles.
  • Current market price not fully reflecting the company being able to sustain the mid-cycle profitability and deleverage its balance sheet.


  • Downgrades to ‘equal-weight’ from ‘overweight’ but hikes price target to Rs 87 apiece from Rs 75.
  • Having higher exposure to long products, SAIL should benefit less than peers in the current cycle.
  • Expects net debt-to-Ebitda to improve to 2.4x in FY23 from 3.3x in FY21, but it would still be the highest in the coverage universe.
  • Forward price-to-book at 0.6x is in line with its 10-year average.
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