Steel stocks are in the spotlight after the Ministry of Finance imposed a safeguard duty on imports of certain steel products for 3 years. Morgan Stanley analysts believe that this has finally triggered the elusive “bull case” scenario for steel companies under their coverage.
According to Morgan Stanley, this is positive news for the industry. They believe that this move could lift domestic hot roll coil prices by 10% in the next few months, driving 16-43% changes in F27e EBITDA across Morgan Stanley’s coverage universe.
Morgan Stanley on JSW Steel: ‘Overweight’
Morgan Stanley maintains an Overweight rating on JSW-Steel, identifying it as a top-tier contender to benefit from the new 12% duty barrier. The firm’s valuation relies on a probability-weighted residual income model that assigns a 30% weight to a Bull case, 60% to a Base case, and 10% to a Bear case. This sophisticated financial assessment assumes a 12.0% Cost of Equity, a 15% terminal Return on Equity (RoE), and a 3% terminal growth rate. Morgan Stanley notes that the Bull case is heavily driven by the potential for duty extensions and a healthier global macro environment that supports higher volumes. While the firm sees significant upside if domestic demand exceeds expectations and project ramp-ups accelerate, it also points to risks involving higher iron ore costs from auctioned mines and potential delays in commissioning new capacity.
Morgan Stanley on Steel Authority of India: ‘Equal-weight’
SAIL holds an Equal-weight rating from Morgan Stanley, with the analysis placing the state-owned giant at the front of the line for immediate gains alongside JSW Steel. Morgan Stanley applies a 30% probability to its Bull case scenario for SAIL, utilizing a 13.1% Cost of Equity and a 13% terminal RoE in its financial modeling. The report emphasizes that the anticipated 10% jump in HRC prices will flow directly to SAIL’s bottom line, given its high sensitivity to domestic price movements. While Morgan Stanley sees upside potential if domestic demand outpaces current projections, the firm warns that weak price momentum or a rapid deterioration in earnings could materialize if global market conditions sour faster than anticipated.
Morgan Stanley on Tata Steel: ‘Overweight’
Morgan Stanley classifies Tata Steel as a primary beneficiary of the new protectionist regime, maintaining an Overweight rating. The firm’s valuation model for Tata Steel incorporates a 30% Bull case, 60% Base case, and 10% Bear case probability weighting. This analysis assumes a 13.1% Cost of Equity, a 15% terminal RoE, and a 3% terminal growth rate. According to Morgan Stanley, the Bull case for Tata Steel depends on a sustained recovery in global steel prices and overall demand. Positive triggers identified by the firm include a faster turnaround in European operations and robust growth in Indian demand, though the analysts also warn of sharp corrections in international prices or deeper financial struggles in Europe as significant factors that could dampen the impact of the domestic safeguard duty.
Morgan Stanley on Jindal Steel: ‘Equal-weight’
Jindal Steel is currently rated Equal-weight by Morgan Stanley, with the firm identifying the stock as a key participant in the Bull case scenario triggered by the three-year duty. The valuation for Jindal Steel is based on the standard 30% Bull, 60% Base, and 10% Bear case weightings, utilizing a 12.5% Cost of Equity and a 13% terminal Return on Equity. Morgan Stanley believes the increased likelihood of safeguard duty extensions provides a long-term price floor that fundamentally supports the company’s valuation. Upside risks noted by the firm include a sudden spike in global demand that could boost exports, while downside concerns center on slower domestic volume growth and potential underperformance in international business units due to rising operational costs.
Morgan Stanley sees long runway ahead for Indian steelmakers
Morgan Stanley projects that the move could drive a 16-43% change in F27e EBITDA for steel companies under their coverage. They believe that industry is positioned for a significant upmove and the top-tier bets include the likes of JSW Steel and SAIL, followed by Tata Steel and Jindal Steel.
