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Steel Stocks Gave Gains Of Over 450% In Last One Year: Should You Invest In Them Even Now?

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Steel companies have been on a roll in the recent past and there have been mixed views on the sector as there is a belief by some of the brokerages that the rally has nothing structural about it and this is justifiable given the current valuations of the country's two large steel producers namely Tata Steel and JSW Steel.

 

Here we look at the last 1-year stock performance of some of the major steel companies:

Here we look at the last 1-year stock performance of some of the major steel companies:

StockClosing price as on May 5, 2021Closing price as on May 5, 2020% Gain
Tata Steel 1070.15 272.65 292%
JSW Steel 717.7 163.9 337%
SAIL 130.3 28.43 358%
Jindal Steel and Power 439.4 85.95 411%
Tata Steel BSL 93.6 16.75 458%

What has been aiding the rally in steel stocks in 2020-2021?
 

What has been aiding the rally in steel stocks in 2020-2021?

Now as we see some of the see steel stocks to increase up to 5 times, here we will know what is fuelling the rally in steel stocks and is there more upside left?

Market Factors, Pricing and FIIs fuelling gains in steel stocks

Steel price gains:

The whole metal pack has been buzzing in trade and in fact in the lackluster April the gains in the metal pack to the tune of over 20% was the main highlight with JSW Steel posting gains of over 50% and Tata Steel over 20% alone in April month. And talking specifically about steel stocks the gains are on the back of increase in price of steel and improved earnings outlook. On Wednesday (May 5, 2021), Tata Steel beat estimates on account of higher income and posted consolidated net profit of Rs. 7162 crore for the March ended quarter of FY21.

As of April, steel prices have gone up by more than Rs. 19000 per ton as per a report.

Demand recovery:

Note that a hike in steel prices has been brought on because of tight supply, improved demand as well as increase in international exports.

Supply crunch with China cutting on production and importing steel on a net basis:

Also as per a news report, Tangshan, the largest steel manufacturing province in China has resorted to production cuts at a time when demand has been reviving. The cut in production has been owing to environmental reasons. And considering it, China has become the net importer of steel in 2020 also after a gap of 12 long years and hence there is witnessed a strong bull run in steel stocks.

Multiple Covid waves has been one reason held responsible for limiting steel supply, cited one of the news daily quoting JSW Steel. Also, the company added that the various stimulus measures taken by the governments are boosting both demand and prices of the commodity. And the massive demand is seen across sectors including construction, auto and chemicals and this is real demand and not hoarding of steel by stockiest.

FIIs increasing their stake in Indian listed steel stocks

Adding to the gains is also the fact that foreign institutional investors are increasing their exposure in these stocks as they remain bullish. Say for instance, FIIs in the just ended March quarter have upped their stake to 18.56% from 16.87%.

Is there more upside in steel stocks left and Should you invest in steel stocks even now?

Is there more upside in steel stocks left and Should you invest in steel stocks even now?

And this price rally is expected to continue for at least two quarters and once the production sets in and even the output that was once non-viable comes into the market, there could be pricing pressure on steel and consequent pressure on steel stocks.

SAIL Buy(Long) Target price: Rs. 162

SAIL Buy(Long) Target price: Rs. 162

The stock of SAIL is rallying for reasons beyond divestment. Notably SAIL's divestment process is ongoing ands gaining for reasons beyond the divestment plan of the government. And owing to margins benefit, the stock was seen to have further upside of 20-25% from price levels as reached in April 2021.

Also, Equirus over the weekend initiated coverage on the SAIL scrip and sees it to hit a target price of Rs. 162 per share. Notably, the company is in its most aggressive expansion plan which was being delayed for the last 10 years.

Domestic HRC prices have risen by about ₹7,000/t in April 2021 and it is trading at about ₹12,500/t discount to Japan landed prices; this implies more headroom for price hikes. With SAIL allowed to sell iron ore and with most of its capex set to commission in FY22, we expect operating leverage to drive EBITDA growth and the stock to see a valuation re-rating over the next two years.

JSW Steel

JSW Steel

As per the intra-day charts and technical indicators the scrip of JSW Steel is in overbought zone. If the stock trades below Rs. 675, there can be a short term correction. Nonetheless, if the stock trades above Rs. 675 ( trend deciding price), the stock price can shoot up to Rs. 750- 775).

Tata Steel  Target price - Rs. 1075- Rs. 1100

Tata Steel Target price - Rs. 1075- Rs. 1100

As per the technical views of Kotak Securities analyst, uptrend in the stock shall continue as suggested by modest volume activity post break-out. Price target for the stock is Rs. 1075- 1100.

Disclaimer: The above mentioned article is purely for informational purposes. It is not a solicitation to buy or sell equity mutual fund schemes. Greynium Information Technologies and the author are nor responsible for losses incurred based on action taken through reading of the article.

About the Author: Roshni Agarwal is an MBA in Finance And Marketing. A personal finance enthusiast her specialization is in the area of stocks, tax, commodities and currency markets. She has an over 5 year experience into covering all the above topics.

Read more about: steel tata steel sail jspl jsw steel
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