Metal companies all around the world generated high returns post the Covid-19 pandemic, compared to the previous cycles. This has resulted in metal companies trading at valuation multiples higher than their historical average.
Nomura states that this trend is likely to continue as factors like strong domestic demand, positive global factors have put Indian steel companies specifically in a sweet spot.
Factors That Are Favourable For Indian Steel Companies:
Strong Domestic Demand: The Indian steel industry is seeing a strong demand growth driven by the auto and construction sectors. As per April- July 2024 data, India's steel consumption was up 15% on annual basis. Nomura expects steel consumption in the country to grow 6.5% and 7% year- on- year in FY25 and FY26.
Cost Drivers: Global and Indian iron ore and steel prices have sharply declined over the past year, primarily due to China's influence. In contrast, Australian coking coal prices are on a downtrend, currently at $190 per tonne. This reduction in coking coal prices could help mitigate the effects of falling steel prices on company revenues.
Cost of Equity: Nomura highlights that JSW Steel and Jindal Steel & Power are improving their capital structures through deleveraging, which is expected to reduce their cost of capital. Historically high debt levels have kept equity costs elevated, but Nomura anticipates a decrease soon.
Indian Companies Best Placed Globally: Nomura states that Indian steel companies are the best placed globally due to lower labour costs.
Global Liquidity Cycle: Nomura believes that the global liquidity indicator shows strong correlation with steel prices. The brokerage expects all major central banks, except Japan, to embark on a monetary easing journey over the next 2-years, which provides a favourable backdrop for the metal sector.
Valuations Will Remain High
Nomura believes that there are structural reasons for metals, especially major India steel companies, to continue trading at valuations higher than historical levels. The brokerage cites factors like:
Higher return on equity versus previous downturns
Continued deleveraging efforts made by companies
Increased domestic demand which will reduces exports dependency going forward
Better incremental return on capital employed for companies from brownfield expansions,
Global monetary easing warranting higher multiples
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