Steel stocks have had a good year, with the past one-year returns ranging from 20 per cent to 45 per cent for four major steel stocks against Nifty50’s 9 per cent returns. The primary driver for the sector has been strong demand and stable raw material prices. The strong performance is even more pronounced against a highly-volatile global backdrop, given the trade disruptions, geo-political disturbances and slowing growth. The sector participants are now aiming for higher capacity but with stronger balance sheets compared to earlier upcycles.
As we step into a new year with the stocks poised strongly at the late end of the upcycle, we highlight the crucial condition which can support or disrupt the continued growth of these stocks.
Capex vs consumption
Government capital expenditure (capex) and public consumption are the two basic demand drivers for the sector, and the outlook is mixed on this front.
Capex budget for FY25-26 was flat at ₹11.2 lakh crore and the growth for FY26-27 is not expected to be high. The signs from fiscal deficit targets are also not supportive. The current fiscal deficit target is at 4.4 per cent of GDP. But this will be impacted by lower tax collections and the elbow room for the government to further raise the capex budget will be limited. The break-up of capex budget will also have a bearing. Several defence projects have been announced in the last year. A higher allocation to defence (capital allocation to defence) at the cost of roads and public infrastructure will be net negative for steel and has to be monitored in the Budget announcements. However, while these constraints act on one side, it needs to be noted that the government capex budget has risen at 27 per cent CAGR in the last five years and even if maintained at this peak, demand support for steel should be good.
At the same time, it can be observed that the government is shifting focus from capex to consumption and the consumption support to steel is strong from several factors. The interest rates have moderated 125 basis points in the last year and the expectation of one more rate cut in early-2026 is mixed. The personal income taxes have been moderated and GST rates on several sectors including cement have been reduced. This implies that consumption (auto and real estate, which are the largest consumers of steel) should be boosted from cash surplus and can be met with debt financing which is cheaper.
Overall, the modest support from capex can be balanced by strong consumption outlook. The GDP growth forecast at 6.5-7 per cent in FY27 also supports an expectation of 8-9 per cent growth for steel and cement sector after applying a modest multiplier.
While demand growth is strong, the critical condition rests on tariffs and the resultant growth of steel realisations as detailed below.
Chinese exports
Chinese steel exports and worldwide tariff structure will be the key monitorable for the steel sector.
Steel is an export commodity unlike cement, that navigates through tariff barriers as per the country-specific policies. In a normal scenario (unaffected by tariffs), steel prices in Asia, Europe and the US — the three major markets — will be in increments of $100-200 per tonne, the cheapest being in Asia, followed by Europe and highest in the US. This can be gauged from the fact that China, with a capacity of 1,000 million tonnes per annum (mtpa), accounts for more than half of the world steel production, followed by India with 150 mtpa production in 2025. Chinese worldwide exports alone account for 100 mtpa and in the last two years, Chinese exports have been in excess of 100 mtpa. If left unchecked by tariffs, China can suppress steel prices in any market, including India, and this is evident from the chart. As and when Chinese exports increase, steel realisations for Indian companies have declined. This holds true in the current context when Chinese exports have surged from 52 mtpa in 2020 to 120 mtpa in 2025.
This situation has been a perennial issue for Indian steel companies. In the last decade, Chinese exports declined from an excess of 100 mtpa in 2015-16 to a low of 52 mtpa in 2020 on account of the Blue Sky policy and internal Chinese demand. To reign in pollution, China implemented the Blue Sky policy to restrict steel companies from high production. But tariffs and the slowing economy have forced China to revert to high steel production. In the last few years, Chinese internal demand from automobiles has been strong, but the realty sector, which is also major end-user of steel, has been on a decline, forcing a revert to a peak export scenario. Unless the Chinese economy and the real estate sector recover, Chinese exports are expected to continue.
Tariffs as a solution
Steel tariffs are a measure to protect the domestic steel industry from a deluge of cheap imports. In the wake of the tariff announcements across the world starting last year, steel tariffs have been announced by several countries, including India, in the last six months. In the latest move, India has levied tariffs or safeguard duty on steel imports on China and Vietnam for the next three years. The tariffs are imposed at 12 per cent initially and will come down to 11 per cent by FY28. This is a follow-up to a 12 per cent temporary duty in April 2025.
The US, which has kickstarted the tariff domino, has a 50-per cent tariff on steel with additional clauses on China. Europe is set to legislate a reduction in import quotas and impose a 50 per cent duty on imports exceeding the quota by June 2026. With India, the US and Europe placing trade barriers on steel, other large producers of steel, wishing to protect their domestic manufacturers, will be compelled to follow suit eventually.
As is evident, tariffs are to be assessed in relativity and not in absolutes. Excess steel production, mainly from China, will most likely flow through to the most advantageous markets (with lower relative tariffs) and that may likely be in India considering a 12 per cent duty against a 50 per cent duty in other markets. This may open India to yet cheaper imports with a 12 per cent increase in competitive prices.
The impact of the safeguard duty has been to arrest the decline in steel realisations that started in FY22 and continued into H1FY26. But even so, companies are expecting a small dip in realisations to the tune of 1-2 per cent in Q3FY26. As is expected, tariffs are a necessary measure but cannot fully protect cheap imports and the government has to monitor and deploy anti-dumping duties to ensure safeguarding.
Commodity prices and spreads
In the first half of FY26, the top four steel companies (Tata Steel, JSW Steel, Jindal Steel and SAIL) reported an average steel realisation growth of 0.8 per cent over FY25 realisation. This would be the first growth in realisations from FY22 when steel prices had peaked. Despite sales volume growth of 6 per cent CAGR in the period, steel prices were on a declining trend on account of the high base in FY22 and followed by increasing imports from China.
The input commodities, on the other hand, have been benign, which has allowed companies avoid sharp EBITDA margin declines. The average raw material cost per tonne for the four companies has increased by a mere 1.2 per cent CAGR in FY22-H1FY26 allowing for a flattish EBITDA margin range. With continued decline of raw material prices and a marginal growth in realisations, the EBITDA margin for the sector increased to 15.7 per cent and is reflected in the sharp rally of stocks in the last six months. But raw materials of coking coal and iron ore are expected to remain flat to marginal growth in the next one year after two years of decline. The financial performance, which was essentially supported by input price weakness, would most likely be unavailable for companies in the next one-two years. This will increase the focus on steel realisation growth and hence on tariffs being effective in safeguarding realisations.
Capacity expansion and leverage
All the four companies are on an expansionary mode. Tata Steel (primarily in India) expects capacity expansion from 30 mtpa currently to 40 mtpa by 2030E. JSW Steel plans to expand capacity from the current 34.2 mtpa to 42 mtpa by September 2027. Similarly, Jindal Steel and SAIL are also looking to expand capacity by 30-50 per cent in the next three years.
The companies’ balance sheets to support the expansion are modestly stretched currently, as shown in the chart. The leverage ratio, measured by net debt to EBITDA, has improved significantly from FY20. But as companies are engaged in expansionary mode, the leverage ratios have increased, but still below earlier peaks.
Overall, either for capacity expansion, financial leverage ratios, EBITDA margins or financial performance, steel price realisations are critical. While the basic parameter of demand, which is to support the prices, is expected to be strong, the only variable is the relative tariffs and the ability to restrict excess Chinese imports. The arrested decline of realisation in H1FY26 is a positive, but prices need to improve further to sustain the stock momentum.
The four stocks are trading at an average 33 per cent premium to the last five-year average one-year forward EV/EBITDA. This is primarily on account of expected addition to capacity and stable steel prices. At such premium, with limited cushion from raw material price deflation from here, both financial performance and expansion that the premiums are resting on will be dependent on a positive outlook for steel prices.
Amongst the four companies, Tata Steel — trading at a lower valuation of 7.8 times EV to one-year forward EBITDA — is anticipating a tariff-based uplift in India and even in Europe. Tata Steel has 10-15 per cent revenue contribution from European operations (the UK and the Netherlands). The upcoming CBAM (Carbon Border Adjustment Mechanism) regulations in Europe should improve prices in the Netherlands and is expected to put pressure on the UK to follow suit. Its domestic expansion plans in Neelanchal, Kalinganagar and Meramandali are ongoing and the company is calibrating additional capacity based on price outlook and market conditions.
JSW Steel, which has the highest leverage amongst the four (3.9 times Net debt to EBITDA), is expected to de-lever in the next half year. Its BPSL acquisition has been de-risked in the September 2025 Supreme Court judgment. The company has also entered a 50:50 JV with Japan’s JFE Steel, valued at ₹31,500 crore, which will be used to reduce debt and allows it to pursue its capacity expansion plans.
In December 2025, we recommended investors accumulate Jindal Steel, which should deliver a strong growth in steel output from the expanded capacity in the first phase and improved margins from the efficiency projects. The company has commissioned a 4.6-mtpa capacity blast furnace at Angul and has also commissioned a 3-mtpa basic oxygen furnace steel plant in September 2025. It will also be commissioning a 3-mtpa steel melting shop by the fiscal year-end. The overall crude steel capacity should increase from 9.6 mtpa in FY23 to 15.6 mtpa, a 60 per cent growth in capacity.
Compared to peers delivering capacity-expansion driven growth, SAIL’s expansion plans, while announced, must be monitored for execution along with debt on the balance sheet, which it plans on reducing before expansion.
Published on January 24, 2026
