JSW Steel a tactical stock idea, 80% chance positive scenario may play out: Morgan Stanley

Morgan Stanley in a note on Monday said JSW Steel's share price may rise relative to the country index over the next 60 days. Initiating a tactical call on the stock, the foreign brokerage said India's steel industry is around the start of a spreads expansion cycle, with domestic steel prices expected to expand as demand improves incrementally, China anti-involution playing out and global macro factors turning favorable.

The brokerage suggested an 'overweight' rating and a price target of Rs 1,300 on the JSW Steel stock. Following the development, the stock was trading 3.56 per cent higher at Rs 1,111.20 on BSE. 

Morgan Stanley said there is optionality in play if safeguard duty gets extension. Against this backdrop, it feels JSW Steel is well positioned, given its high share of domestic business skewed in favor of flat steel, with margin expansion in play from HRC price expansion and strong volume growth. 

"We expect the stock to do well despite rich valuations. We estimate that there is about an 80%+ (or "highly likely") probability for the scenario. Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario," it said.

In its bull case, Morgan Stanley sees improved global macroeconomic environment supports steel prices and volumes in the medium term, further supported by a higher chance of safeguard duty extension. In its bear case, it sees unfavorable demand/supply and steel price outlook in the medium term. In this scenario, Cost of equity is seen at 12 per cent, terminal return on equity (ROE) at 15 per cent and terminal growth at 3 per cent.

Risks to the upside include domestic demand and company volume growth improving ahead of expectations, leading to higher steel prices; Faster project ramp-up is also seen as a risk to the upside.

Risks to downside include weaker-than-expected prices/volume momentum, delay in commissioning of new capacity and higher-than-expected iron ore cost from auctioned mines.