Nifty Metal Hits New High: Nifty Metal index added over a per cent and outperformed all other indices in the morning session on the first trading day of the new year on January 2. Shares of Tata Steel and Hindalco are the top gainers on the Nifty 50 index on Monday, trading with gains of 5.2 per cent and 3.3 per cent respectively.
Brokerage firm Jefferies has turned positive on Indian metal companies after exercising caution for over a year. It believes that worst on the EBITDA margin front is done for India’s steel companies and majority of the earnings cuts are also well past. The global research firm, after remaining cautious on the Indian steel sector and then turning positive, and has upgraded Tata Steel and Hindalco Industries to ‘buy’ from ‘hold’. It has Tata Steel as the top pick. The revised price targets of Rs 150 (Rs 95 earlier) and Rs 600 (Rs 390 earlier), imply a potential upside of 33 per cent and 25 per cent respectively from their current levels.
Jefferies said that the worst-margin quarter for the steel sector, and the big chunk of earnings cuts for Tata Steel and Hindalco Industries are behind. “Tata Steel’s price to book (PB) and enterprise value (EV) are close to its long-term averages, which we find attractive amid its improving asset footprint and balance sheet,” it said.
“China has unveiled a comprehensive plan to support the property markets, and has set a new direction for the Covid policy to stabilise the economy which, along with other stimulus measures, should drive a recovery in metal demand in 2023. Weakening US and EU macro poses a risk to the global metal demand, but a potential improvement in China and strong demand in India could provide an offset,” the research firm said.
“If the US Fed rate hikes slow as CPI decelerates, and if China continue to relax Covid restrictions, then the cyclical bottom in metals might be close, if not behind,” it added.
Earnings Outlook
“We believe Indian steel margins for Tata Steel and Jindal Steel and Power (JSPL) after falling for the last five quarters, should improve as steel price holds up while the benefit of lower coking coal cost flows through. For Hindalco, Novelis margins are likely to worsen in H2 FY23, but already factored in our estimates. We had cut FY23-24 EPS for Tata Steel, Hinalco, JSPL by 15-80 per cent over January-November, but believe the big downgrades are behind,” Jefferies said in its report.
Tata Steel – Top Pick
Tata Steel’s valuations are attractive, according to Jefferies. That, along with its rising share of the high-margin India business in volumes and continued deleveraging is what keeps them bullish on the stock. It expects negative free cash flow for Tata Steel in the current financial year, but expects the same to turn positive in financial year 2024. Brownfield expansions should also start contributing to volumes by financial year 2025, according to Jefferies.
Hindalco is also reasonably priced at 1.1x FY24 PB (11-12 per cent FY24-25 ROE) and 1.1x FY24 EV/IC against long-term average of 0.8x PB (9 per cent RoE) and 0.9x EV/IC. However, we find JSPL expensive at 2.4x FY24 PB (12-13 per cent FY24-25 RoE) and 1.6x FY24 EV/IC against long-term average of 1.5x PB (12 per cent RoE) and 1.1x EV/IC, the brokerage firm said in the report.
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