Jindal Steel and Power vs JSW Steel: Which is a better stock for long term?

At a time when markets and many sectoral indices have hit record highs, the metal space remains one of the worst performers of 2023. The Nifty Metal index is still down over 8 percent this year so far. The weak growth outlook, poor earnings, multiple downgrades, softness in steel prices and margins under pressure have led to the ongoing correction in the metal space.

Amid this backdrop, let's analyse, between Jindal Steel and Power (JSPL) and JSW Steel (JSW), which steel major has better opportunities in the long term.

Stock Price Trend

In the last one year, both JSPL and JSW Steel have outperformed the benchmark Nifty Metal, however, the former is a better performer between the two. JSPL has rallied over 90 percent in the last 1 year while JSW Steel has advanced around 38 percent in this period. In comparison, the Nifty Metal index has added 31 percent in this time.

However, 2023 has not been a strong year for either stock. While JSPL is mostly flat, up just 0.7 percent this year so far, JSW is down a little over 1 percent in this time. Meanwhile, Nifty Metal has shed 8 percent this year.

In 2023, both JSW and JSPL have given negative returns in 3 of the 6 months.

JSPL has soared nearly 13 percent in June so far after an 11.2 percent fall in May. Meanwhile, it rose 6.7 in April. However, it lost 0.5 percent and 5.9 percent in March and Feb, respectively. In Jan the stock was up just 0.5 percent.

JSW, on the other hand, has also jumped 9 percent in June so far after a 4 percent fall in May. Meanwhile, it added 5.4 percent in April and 3.1 percent in March. However, it was down around 7 percent in Jan and Feb each.

But it is important to note that earlier this week, JSW hit its 52-week high of ₹786.40 on June 20, 2023. Currently, the stock is trading 43 percent higher than its 52-week low of ₹541, hit on July 6, 2022.

Meanwhile, JSPL is still 4.5 percent away from its 52-week high of ₹622.40, hit on February 1, 2023. But it has advanced 95 percent from its 52-week low of ₹304.20, hit on June 22, 2022.

Meanwhile, in the long term - last 3 years, both steel majors have given mutlibagger returns. While JSPL has surged 305 percent, JSW has jumped 283 percent.

Earnings

In the March quarter, JSPL's consolidated net profit fell 69 percent to ₹462 crore versus ₹1,511 crore in the same quarter last year. Revenue from operations, as well, fell 4 percent to ₹13,691 crore during the quarter under review as against ₹14,339 crore in the year-ago period.

For FY23, JSPL's production fell to 7.89 mt as against 8.01 mt in FY22. Meanwhile, its total sales (including pig iron) stood at 7.68 mt compared to 7.64 mt in FY22. The company also continued its journey of deleveraging and further reduced its net debt by ₹1,923 crore during the year. Consolidated net debt stood at a 15-year low of ₹6,953 crore, as of March 2023.

MD Bimlendra Jha said, "Our balance sheet is the strongest amongst the large integrated steel players in India and our leverage ratios are also amongst the lowest compared to the large integrated steel players in India despite a volatile macro environment."

JSW, on the other hand, posted a 13 percent growth in consolidated net profit at ₹3,664 crore for the quarter ended March as against ₹3,234 crore in the same period last year. Revenue from operations in Q4FY23, however, was flat at ₹46,962 crore versus ₹46,895 crore in the corresponding quarter of last year.

The company's consolidated net debt to equity stood at 0.89x at the end of the March quarter as against 1.09x at the end of the December quarter.

Its net debt as of March 2023 was at ₹59,345 crore, lower by ₹10,153 crore compared with the December quarter, mainly due to healthy cash generation and the release of working capital. Meanwhile, its crude steel production during the quarter was the highest ever at 6.53 million tonnes, up 13 percent YoY.

The company said India is seeing healthy steel demand growth which will support the company's performance in the coming quarters despite challenging global economic scenario.

Which one should you bet on for the long term?

Suman Bannerjee, CIO, Hedonova, a US-based hedge fund prefers JSW over JSPL.

I feel JSW Steel will perform better in the long term. JSW Steel has an extensive distribution network encompassing more than 16,000 retail outlets, which spans over 600 districts in India. Furthermore, the company's global reach extends to over 100 countries across five continents, as it exports its products worldwide. JSW Group has a steel capacity of 28 million tonnes. However, the company aims to surpass 50 million tonnes by 2030.

In a contrarian view, Vinit Bolinjkar- Head of Research - Ventura Securities has picked JSPL over JSW

JSPL is improving its product profile closer to JSW Steel and integrating its production chain which could improve its profitability. In addition, its FY26 EV/EBITDA valuation is 4.4X, which is a 30% discount to the 6.3X EV/EBITDA valuation of JSW Steel. Hence we would prefer JSPL over JSW as a long-term holding.

JSPL is expanding its capacities in 2 phases –

1) 3.3 MTPA Q4FY24, which will be ready by Q4FY24 and

2) An additional 3 MTPA will be operational by Q2FY26.

It will take the overall production capacity of JSPL from the current 9.6 MTPA to 15.9 MTPA by FY26. In addition, the company is also constructing 12 MTPA pellet plants, 18 MTPA slurry pipelines, and four coal extraction facilities (15 MTPA) at captive coal mines. This backward integration is expected to be ready over the next 4-5 quarters.

To further enhance its operational capabilities, JSPL is developing a hot-strip mill, thin slab caster, and rail mill. This forward integration is expected to be ready by Q3FY24.

JSPL’s ongoing expansion projects would fill various existing gaps in the production chain and improve forward-backward integration, which could improve operating margins.

Nirav Karkera Head of Research at Fisdom also likes JSPL better between the two.

In the comparison between JSPL and JSW Steel regarding long-term opportunities, both stocks have shown impressive performance over the past year, outperforming the overall metal index. JSPL has outperformed the index by around 50 percent, while JSW Steel has outperformed by 10-15 percent. However, recent challenges and headwinds have affected their performance in the last six months. These headwinds include factors like an anticipated recession in Europe, a decline in global crude steel production, a decrease in China's production, and a temporary decline in domestic crude oil production.

Considering these factors and taking into account the plans for FY24, we believe that JSPL holds a better long-term potential than JSW Steel. We are particularly optimistic about JSPL due to its expected positive cost structure changes, positioning it as a more efficient and streamlined entity. This transformation will be driven by leveraging captive coal blocks, the benefits of increased operational scale, and an improved product mix, leading to margin expansion. JSPL also maintains a strong balance sheet despite its ongoing expansion endeavours. Given the current market conditions, we see the recent weakness in JSPL's stock as an attractive buying opportunity.

It's important to note that we do not have a sell call on JSW Steel; instead, we maintain a neutral stance on the stock. From our perspective, the risk-reward ratio is more favourable for JSPL at this stage. While JSW Steel may experience better volume growth, its high debt levels are unlikely to decrease significantly due to its capital commitments.

Technical View

Pravesh Gour, Senior Technical Analyst, Swastika Investmart analyses both stocks. He said that structurally JSW Steel looks more promising for the long term. Here's his technical view on both stocks.

JSPL: The counter has given a breakout of the triangle formation. It retested its last breakout level at ₹500 and started a new leg of the rally towards ₹700. The structure of the counter is classical, as it is trading above all its important moving averages.

The momentum indicator RSI (relative strength index) is also positively poised, whereas MACD (moving average convergence divergence) is supporting the current strength.

On the upside, 620 will be an immediate hurdle; above this, we can expect a level of ₹650 /700 in the short to long term. On the downside, ₹490 is a strong support level for any bounce-back.

JSW Steel: The counter has witnessed a breakout of a symmetrical triangle formation on the daily chart. However, it has a neck-line resistance zone at 790–800. The counter looks lucrative for the long term, as it is trading above all its important moving averages.

The momentum indicator RSI (relative strength index) is also positively poised, whereas MACD (moving average convergence divergence) is supporting the current strength.

On the higher side, ₹800 is facing resistance; above this, we can expect a move towards 900 in the long term, while on the downside, ₹680 is the immediate support; below this, ₹650 will be the next important support level.