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MOSL: METALS-73mt opportunity-JSW Steel and Tata Steel – the only contenders

​METALS: 73mt opportunity; JSW Steel and Tata Steel – the only contenders

Indian steel demand growth has historically moved in tandem with the economic cycle. However, demand growth CAGR has been 6-8% if looked in 10-year windows.

• We expect Indian steel demand to grow at a CAGR of 7.3% over the next 10 years. Indian steel producers' recent investments in adding capacities will only help meet demand for the next three years. The gap between demand and supply is expected to start emerging as early as FY21, and widen to 73mt by FY27 if no investment is made.
  
• Therefore, it is the right time to build globally competitive new capacities, which will require large capex of INR150-250b.
  
• We note that only JSW Steel (JSTL) and Tata Steel (TATA) have the balance sheets to support such capex. All other large private names are either under debt trap or have stretched balance sheets, with possibility of Indian banks exercising bankruptcy proceedings against some of them. Public sector companies have a poor execution track record.
  
• JSTL is our top pick. We expect its stock price to double in three years. We are raising the target price to INR280/share, rolling it over to FY19E.
  
• TATA's business is structurally improving due to its exit from weak assets and de-risking from pension liabilities in the UK. We are raising the target price to INR581, rolling it over to FY19E. We upgrade the stock to Neutral.