After almost a year of cautious view, global brokerage Jefferies said it has turned positive on India metals. China has started to ease Covid policy and support its ailing property sector. The brokerage believes the worst-margin quarter for Indian steel, and the big chunk of earnings cuts for Tata Steel/Hindalcoare behind.
“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,” the note stated. 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.
The brokerage turned cautious on Indian steel in January 2022, as it believed the earnings cycle was inflection-down while market was too optimistic on a China stimulus. It finds the landscape flipped now with China policies turning supportive and the big earnings cut for TATA/HNDL behind. Jefferies believes a sequential improvement in quarterly EBITDA trend for Tata Steel/Hindalco in 2023 will help drive stock performance.
While metal prices and spreads might remain volatile nearterm, it believes the big correction is behind, and any positive macro developments in China could provide upside.
Meanwhile, the brokerage house has retained its Hold on Coal India (with a target price of ₹220) and Underperform on JSW Steel (TP: ₹470). Its top pick in Indian metals is Tata Steel, followed by Hindalco.
“We believe Indian steel margins for Tata Steel and JSW Steel,after falling for the last five quarters, should improve as steel price holds up while the benefit of lower coking coal cost flows through. In Hindalco, Novelis margins are likely to worsen in 2HFY23, but already factored in our estimates,” it said.
Jefferies finds Tata Steel attractive on valuations with the stock trading at its long-term average PB and EV/IC multiples of 1.0x despite higher ROE, rising share of higher-margin India business in volumes and continued deleveraging. Hindalco is also reasonably priced, as per the brokerage, which, however, finds JSW Steel expensive.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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