New Delhi: Global brokerage Jefferies reported that it has turned positive on Indian metals after almost a year. China has begun to relax the Covid policy and support its struggling property sector. The brokerage thinks the big chunk of earnings cuts for Tata Steel/Hindalco and the worst-margin quarter for Indian steel are behind.
According to the reports, “Tata Steel’s PB and EV/IC valuations are close to its long-term averages, which we find attractive amid its improving asset footprint and balance sheet.” Jefferies has upgraded metal stocks Tata Steel (with a target price of ₹150) and Hindalco’s (with a target price of ₹600) rating to Buy from Hold.
In January 2022, the brokerage turned cautious on Indian steel, believing the earnings cycle was inflection-down while the market was too optimistic about a China stimulus. With China policies turning supportive and significant earnings cut for TATA/HNDL behind it finds, the landscape flipped now. Jefferies believes in 2023, a sequential improvement in the quarterly EBITDA trend for Tata Steel/Hindalco will help drive stock performance.
While metal prices and spreads might remain unstable nearterm, it thinks the big correction is behind, and any positive macro developments in China could offer an upside.
For the moment, the brokerage house has its reserved Hold on Coal India (with a target price of ₹220) and Underperform on JSW Steel (TP: ₹470). Tata Steel is its primary choice for Indian metals, after which Hindalco stands.
Reports said, “We think Indian steel margins for JSW Steel and Tata Steel, after falling for the previous five quarters, should improve as steel price increase while the benefit of lower coking coal cost flows through. Novelis margins may worsen in 2HFY23 in Hindalco, but already factored in our estimates.”
Tata Steel’s stock trading at its long-term average PB and EV/IC multiples of 1.0x despite increasing ROE, the rising share of higher-margin India business in volumes and ongoing deleveraging Jefferies deemed the company to be attractively valued. Hindalco is likewise decently priced, as per the brokerage, which finds JSW Steel expensive.
