Top 4 Stocks Poised to Benefit from the Potential Revival of Chinese Economy

It is famously said that when the US sneezes, the world catches a cold. Such has been the profound impact of the US economy on the rest of the globe.

After the US Federal Reserve implemented a substantial rate cut, China also took steps to ease its monetary conditions through the People's Bank of China (PBOC).

The Chinese government has also introduced a substantial stimulus package, signaling further support to revive the country's struggling economy.

These initiatives are anticipated to drive up demand for infrastructure construction, manufacturing, and other sectors heavily reliant on metals, leading to an increase in metal prices.

Industry experts predict that Indian steel producers may see a turnaround in their recent underperformance due to the expected surge in demand from China. This could impact pricing, imports, and margins for steelmakers.

Looking ahead, the Indian steel industry is also expected to benefit from global trends. The projected addition of 23 m tonnes of capacity between 2023 and 2027 is expected to fall short of the growth in demand, positioning Indian steelmakers favorably.

With these developments in mind, today we will explore some of the top Indian companies in the steel industry that could potentially benefit from the increased demand for steel in China.

Let's have a look...

#1 Vedanta

First on the list is Vedanta.

Vedanta Ltd is a diversified natural resource group engaged in exploring, extracting, and processing minerals and oil & gas.

The group is involved in the exploration, production, and sale of zinc, lead, silver, copper, aluminium, iron ore, and oil & gas. It has a presence across India, South Africa, Namibia, Ireland, Liberia, and the UAE.

Its other businesses include commercial power generation, steel manufacturing, and port operations in India, as well as the manufacturing of glass substrate in South Korea and Taiwan.

Currently, India accounts for approximately 65% of total revenues, followed by Malaysia at 9%, China at 3%, UAE at 1%, and other countries at 22%.

Vedanta Financial Snapshot (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	-8%	4%	51%	11%	-2%
Gross Profit Margin (%)	73%	73%	73%	70%	69%
Operating Profit Margin (%)	25%	31%	34%	23%	25%
Net Profit Margin (%)	NM	17%	18%	10%	5%
Return on Capital Employed (%)	10%	17%	28%	20%	21%
Return on Equity (%)	NM	24%	36%	37%	25%

Data Source: Ace Equity

In terms of financial performance, Vedanta reported quarterly revenue of Rs 352.4 bn, showing a strong 6% YoY increase.

The company also saw a 20% YoY decrease in overall costs, positioning Vedanta as a leader in cost efficiency.

Vedanta's operating profit surged to Rs 102.8 bn, marking an impressive 47% YoY growth, with the operating margin expanding by 10% to reach an industry-leading 34%.

The profit after tax also saw a significant rise, climbing by 54% YoY to Rs 51.0 bn. Free cash flow before capital expenditures grew to Rs 43.7 bn, up 41% YoY, showcasing improved operational efficiency.

Going forward, the key upcoming projects include full backward integration in aluminium to ensure 100% self-sufficiency in bauxite, alumina, and coal, targeting 30 m tons of iron ore production annually in Liberia.

Expansion plans also include replicating Zinc India's success globally, with a commitment to delivering 1 m tons of zinc production from its international operations, alongside ramping up copper production through its recently regained control over Konkola Copper Mines.

Vedanta also filed a strategic demerger application with NCLT, aiming to create more focused entities with sharper investment propositions.

Management remains optimistic about Vedanta's growth trajectory, driven by strong financial performance, strategic initiatives, and a firm commitment to sustainability.

For more details, check out Vedanta's fact sheet and quarterly results.

#2 Jindal Steel & Power

Second on the list is Jindal Steel & Power.

JSW Steel is mainly involved in manufacturing and selling iron and steel products. It is the leading business of the diverse JSW Group.

The group also has interests in energy, infrastructure, cement, paints, sports, and venture capital.

The company's diverse portfolio includes products such as hot-rolled, cold-rolled, galvanneal, galvanized/galvalume, pre-painted, tinplate, electrical steel, TMT bar, wire rod, special steel bar, round, and bloom categories.

Jindal Steel & Power Financial Snapshot (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	-19%	-9%	48%	4%	-5%
Gross Profit Margin (%)	70%	68%	60%	54%	56%
Operating Profit Margin (%)	18%	32%	30%	19%	20%
Net Profit Margin (%)	NA	12%	13%	7%	12%
Return on Capital Employed (%)	5%	14%	24%	14%	13%
Return on Equity (%)	NA	13%	19%	10%	13%

Data Source: Ace Equity

In terms of its financial performance, Jindal Steel & Power reported an 8.2% increase in revenue in Q1 FY25, reaching Rs 136.1 bn.

The company recorded a 14% YoY increase in sales volume, totaling 2.1 m tons, mainly attributed to higher sales of HSM products.

The company's EBITDA for the first quarter was Rs 28.3 bn, marking a 13% QoQ increase, while the profit after tax (PAT) surged by 43% QoQ to Rs 13.4 bn.

The company's capital expenditure for the quarter amounted to Rs 27.9 bn.

Jindal Steel & Power remains optimistic about the growth potential of the domestic steel market, driven by infrastructure development, and is currently prioritising domestic demand over exports.

The company is focusing on agility, versatility, and adaptability as key areas for business execution.

For more information, you can check out the financial factsheet and the quarterly results.

#3 Hindalco

Third in the list is Hindalco.

Hindalco Industries is an Indian aluminium and copper manufacturing company. The company is a subsidiary of the Aditya Birla Group.

Hindalco is the largest aluminium rolling and recycling corporation in the world, as well as a major copper player. It is also one of Asia's top primary aluminium producers.

Building and construction, auto-motives, packaging, electrical, consumer durables, refractories, and ceramics are some of the industries it serves.

Hindalco Financial Snapshot (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	-10%	12%	48%	14%	-3%
Gross Profit Margin (%)	42%	42%	40%	37%	38%
Operating Profit Margin (%)	12%	13%	15%	10%	11%
Net Profit Margin (%)	3%	3%	7%	5%	5%
Return on Capital Employed (%)	9%	9%	17%	11%	11%
Return on Equity (%)	6%	5%	18%	11%	10%

Data Source: Ace Equity

Coming to its financials, Hindalco reported a decrease in the sales for FY24 of 3.2% YoY to Rs 2.1 tn. The net income for the year saw a marginal increase of 0.6% to Rs 101 bn.

The company signed an MoU with American battery manufacturer Charge CCCV (C4V) for the supply of coated battery foils and structural components for the manufacturing of lithium-ion batteries.

As per the agreement, Hindalco will supply up to 2,000 tons of battery-grade aluminium foils to C4V for a period of five years. The strategic collaboration also includes joint development of material technologies and related know-how.

Going ahead, the company is focused on downstream expansions in India, with an emphasis on increasing contributions from value-added products.

This strategy aims to enhance profitability and protect the company from fluctuations in aluminium prices.

Further, it expects to sustain its positive momentum in the copper business, driven by increasing volumes, robust demand, and improved TC/RC (Treatment Charge/Refining Charge) margins.

For more information, you can check out the financial factsheet and the quarterly results.

#4 Steel Authority of India

Fourth on our list is Steel Authority of India.

Steel Authority of India Ltd (SAIL) is one of the largest public sector company manufacturing iron and steel in India.

Although the government of India owns 65% of the company's equity, this 'Maharatna' enjoys operational and financial autonomy.

It exports its products to over 30 countries and has been strengthening its presence in the international markets.

SAIL has the most diversified product range offered by any domestic steel company. It caters to a large number of industries, including power, road and rail infrastructure, oil and gas, irrigation, and airport and port infrastructure.

Steel Authority of India Financial Snapshot (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	-8%	12%	50%	1%	1%
Gross Profit Margin (%)	61%	60%	59%	45%	48%
Operating Profit Margin (%)	17%	18%	21%	8%	11%
Net Profit Margin (%)	3%	6%	12%	2%	3%
Return on Capital Employed (%)	8%	11%	24%	6%	8%
Return on Equity (%)	5%	9%	23%	4%	5%

Data Source: Ace Equity

In the first quarter of FY25, Steel Authority of India reported a turnover of Rs 237.6 bn, which was impacted by declining price realisations.

The company achieved a crude steel production of 4.7 m tons and saleable steel production of 4.2 m tons. Saleable steel sales volumes increased by 3.3% YoY to 4.0 m tons, with domestic sales growing by 5%, while exports experienced a significant decline.

EBITDA improved by 16% YoY to Rs 24.2 bn, compared to Rs 20.9 bn in the previous year.

However, the net profit for the quarter stood at Rs 820 m, a decline from Rs 2.1 bn in Q1 FY24.

Looking ahead, the company anticipates positive domestic steel demand driven by government infrastructure spending, with margin improvements expected in the upcoming quarters.

The targeted crude steel production for FY25 is 20.9 m tons, with sales volumes of 19.3 m tons.

The capex guidance for FY25 is Rs 63.0 bn, with plans for Rs 70.0 bn in the coming years, including major expansions at the IISCO plant and brownfield projects at Bokaro and Durgapur.

For more Information, you can check out the financial factsheet and quarterly results of the company.

Conclusion

While the recent announcements from the US and China have undoubtedly lifted market sentiment and sparked optimism in the steel industry, caution is warranted.

The central bank's interest rate cuts and other monetary policies could prove ineffective in a climate of weak credit demand, illustrating the phenomenon of "pushing on a string."

Historically, monetary easing during economic downturns does not always yield the desired outcomes, especially when contrasted with tightening measures during economic booms.

Furthermore, the initiatives rolled out thus far fail to tackle the deep-rooted issues within China's economy that continue to hamper growth.

Factors such as Beijing's prioritisation of national security over economic development, discrimination against the private sector, and insufficient fiscal policies remain significant hurdles.

Given these challenges, the Indian steel industry may still experience favorable conditions, but investors should approach opportunities with prudence.

It is essential to evaluate any investment carefully, considering both the potential for growth and the underlying economic uncertainties.

Staying conscious of these dynamics will be crucial for making informed investment decisions in the evolving landscape.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...