Why Goldman Sachs Prefers JSW Steel Over Tata Steel

Elevated steel prices in India and softening input costs will drive higher profitability for the sector and two stocks, in particular, will benefit.

That’s the word from Goldman Sachs which initiated coverage on JSW Steel Ltd. and Tata Steel Ltd. with a buy and a neutral rating, respectively. The brokerage prefers the former given its higher profitability.

Goldman Sachs put a price target of Rs 315 on JSW Steel, implying an potential upside of 16 percent, saying it is better placed to benefit from this cycle given the tailwinds from lower raw material cost. It has a price target of Rs 780 on Tata Steel with a potential upside of 6 percent.

JSW Steel Versus Tata Steel

• JSW Steel’s lower capital expenditure per tonne leads to higher return profile.
• A lower gestation period and capex to set up new facility leads to a higher return on capital and equity for JSW Steel as compared to Tata Steel.
• Profitability would increase for JSW Steel and be higher than that of Tata Steel due to weakening coking coal and stable iron prices which narrows the differential gap between the two players.
• Tata Steel’s elevated leverage is expected to weigh on returns, but expectation of sustainability of European profitability and higher volumes in India have been fairly priced into the stock.
• Goldman Sachs would turn constructive on visibility on a timely execution of expansion plans, which would imply faster volume and profit growth trajectory.