Goldman has initiated coverage with Buy call on JSW Steel and Neutral call on Tata Steel as it expects return on equities of both companies to rise 600-725 bps over FY17-FY20.
Goldman Sachs said the Indian steel sector is in the midst of a multi-year upcycle and the upcycle is likely to see strong steel prices but lower input costs
Higher spreads, rising capacity utilisation and improving iron ore supply are positives for the sector, it added.
The research house expects steel prices to be strong led by supply discipline in China and elevated steel prices with softening input costs to drive profitability.
It feels increased focus on infrastructure and rural spending, and pick up in durable/auto sales and real estate will drive demand.
JSW Steel | Rating - Buy | Target - Rs 315
The global investment firm said JSW Steel is best placed to benefit from shift in macro-economic landscape. The stock price rallied nearly 3 percent intraday Wednesday.
The research house has set a target price at Rs 315 per share as it expects company's capex to drive growth and realisations.
Goldman expects strong free cash flow generation and deleveraging going ahead and also expects net debt to EBITDA to reduce to 2.6x by FY20 versus 4.2x in FY17.
The brokerage firm expects company's revenue/EBITDA/net profit to grow at a CAGR of 8.6/14/28 percent over FY17-20. "We expect return on equity / return on capital employed to expand to 23/13 percent by FY20 versus 17/8 percent in FY17," it said.
Goldman expects JSW's dividend payout to remain stable at 15 percent over the medium term.
Tata Steel | Rating - Neutral | Target - Rs 780
The research house has set a target price of Rs 780 for the stock, implying a 7 percent potential upside from Tuesday's closing price.
According to the research house, Tata Steel's Phase 1 of Kalinganagar plant is expected to drive near-term volume growth.
India profitability is expected to be impacted by narrowing spreads, but European profitability is expected to remain stable over medium term, it feels.
"We don’t take view on European JV deal materializing and estimates don't incorporate European JV," it said.
Goldman said it has initiated neutral call on the stock as positives have been fairly priced in.
The research house expects volume/EBITDA/net profit to grow at a CAGR of 6/10/21 percent over FY17-20, and Return on equity/return on capital employed to expand to 17/8 percent by FY20 versus 10/5.7 percent in FY17.
"We could turn constructive on visibility of timely execution of expansion plan," Goldman said.At 13:21 hours IST, the stock price of JSW Steel was quoting at Rs 268, up 1.36 percent and Tata Steel was up 0.81 percent at Rs 735 on the BSE.