Tata Steel and Jindal Steel and Power (JSPL) are two of the biggest steel companies in India. In the last 5 years, both stocks have more than doubled investor wealth. However, JSPL outperformed Tata Steel, rising 160 percent as against a 104 percent gain in the latter.
However, the last 1 year has not been very good for the steel firms on the back of rising raw material prices but the stocks have recovered a bit recently.
In the last 1 year, Tata Steel has shed 26 percent while JSPL has lost 10 percent as against a 4 percent decline in the Nifty Metal index, however, in 2022 YTD, Tata Steel is down only 3 percent while JSPL is in the green, up 4 percent.
The recovery came in the last 1 month, where Tata Steel surged 22 percent, the highest performing stock in the metal index while JSPL advanced 15 percent on the back of consolidation in raw material prices.
About the firms
Tata Steel is the steel arm of the prestigious Tata Group. It's primarily engaged in the business of steel making, including raw material and finishing operations. Its product portfolio caters to Agriculture, Automotive, Steels, Construction, Consumer Goods, Energy and Power, Engineering, and Material Handling sectors. The company is also the world's most geographically diversified steel producer in over 50 countries.
JSW Steel, on the other hand, is a part of the JSW Group and is involved in the business of manufacturing and selling iron and steel products and power generation. The Iron and steel products segment comprises of manufacturing of Steel products, sponge iron, pellets and castings. The Power segment comprises of business of power generation. JSPL caters to a range of customers with a portfolio of products spanning flat, long and special products, focused on delivering customized, steel to its clientele. JSPL also has a sizable power portfolio, comprising independent power plants (IPPs) and captive power projects (CPP).
Tata Steel's net profit declined 13 percent YoY to ₹7,765 crore for the quarter ended June 2022 versus ₹8,907 crore recorded during the same quarter last year. On a sequential basis, the net profit fell 20.4 percent from ₹9,756 crore in the January–March quarter.
Its consolidated revenue, however, rose 18.6 percent to ₹63,430 crore versus ₹53,465 crore in the year-ago period. However, sequentially the revenue declined 8.5 percent.
The company's performance during the quarter was impacted by the higher raw material prices leading to an increase in operating costs. Also, the export duty imposed by the government declined the exports which had a negative impact on the volumes. However, various brokerages remained bullish on the stock since the company beat Street estimates.
Meanwhile, JSPL reported a net profit of ₹1,970 crore in the first quarter of the fiscal year 2022-23, down 22 percent lower from ₹2,543 crore in the year-ago period. Its revenue during Q1 FY23 rose 23 percent to ₹13,045.4 crore, as against ₹10,609.5 crore posted in the corresponding quarter of last fiscal.
“With a strong balance sheet to support growth, increasing raw material security, and low cost of production, JSP remains well positioned to withstand cyclical challenges and will continue to work on its goal to enhance stakeholder value,” the firm's earnings press release stated.
Tata Steel vs JSPL: Which one to pick?
Vinit Bolinjkar, Head of Research at Ventura Securities prefers JSPL over Tata Steel. Bolinjkar believes that the international operations of Tata Steel mainly in Europe can get affected due to the unavailability of Russian Gas which can lead to hike in power prices.
"However, UK gets its gas supplies from USA and Qatar also which can also help to lower prices to some extent. Given many uncertainties surrounding Tata Steel, we believe that one should pick JSPL which is insulated as regards geopolitical issues are concerned," said Bolinjkar.
Meanwhile, According to Macquarie, Tata Steel's consolidated EBITDA beat expectations. European Union (EU) EBITDA per tonne surprised positively, as lagged impact of a steel price hike was reflected during the June quarter. The brokerage expects profitability to fall in the second half of FY23 given a recent correction of steel prices in the EU. It has a 'buy' call on the stock and expects it to hit ₹1,670, indicating a potential upside of 74 percent.
For JSPL, Kotak Institutional Equities said that with a sharp increase in working capital, strong earnings failed to reduce debt much. But the brokerage house estimates a sharp contraction in the margin in the remaining nine months of FY23. It has a 'reduce' rating on the stock with a target price of ₹360. However, CLSA and Citi are bullish on JSPL but cut their target prices. CLSA believes that valuations offer comfort, but the steel price outlook remains uncertain.
Steel sector outlook
2022 was a remarkable year for the steel industry despite the rising raw material prices and imposition of export duty. The entire sector reported its best financial performance on the back of an upswing in the steel cycle. Going forward, the long-term perspective on the sector remains positive driven by government initiatives to boost infrastructure, housing, and the automobile industry.
"We are starting to see production cuts in China and Europe to balance market supply and demand, in response to sharp declines in prices and margins. Raw material chains are also deflating with coking coal prices reducing to US$ 240-250/t and iron ore prices dropping below US$ 100. These factors should help margins return to mid-cycle levels over the next couple of quarters. A key catalyst for the sector is stabilisation of steel demand in China as the stimulus translates to accelerated infrastructure investments," said BoB Capital in a recent note.