The Nifty Metal index fell about 10 percent during the January 31-March 3 perid, largely impacted by the global volatility due to Coronavirus which has led to the destruction in demand. But there is still a silver lining for Tata Steel and JSW Steel.
“While being conscious of the near-term demand destruction emanating from Coronavirus, we see the supportive environment for metals from 2HCY21 on the back of expected Chinese stimulus, credit impulse, and global liquidity support,” Ambit Capital said in a report.
“We see global and domestic mill utilization scaling up through FY22, supporting spreads. Both Tata Steel (TSL) and JSW Steel (JSW) should generate >20% EBIDTA CAGR through FY22E,” said the report.
As an early cycle, metal, steel stand to benefit the most from Chinese infrastructure spend. Global cyclical recovery and re-stocking should provide added support. On the valuations front, peak earnings in FY22, 10-15% is below expectations.
Ambit has initiated a buy call on Tata Steel with a target of Rs 550 which translates into an upside of over 40 percent from March 3 closing level of Rs 387 on the BSE. It is also Amibit’s top pick on steeper Indian cost curve post
JSW Steel is also a buy call with a target of Rs 350 which translates into an upside of another 40 percent from March 3 closing level of Rs 245 on the BSE.
India Entering Sweet Spot:
India entering sweet spot as capacity additions to lag demand growth. Capacity additions in India through FY23E should underwhelm given: a) no material greenfield expansion and b) majors have expanded capacity through stressed asset acquisition.
“Even assuming 4.9 percent CAGR steel demand growth through FY23, compared to 5.7 percent CAGR in the previous 5 years, we expect incremental capacity additions to lag demand growth through FY23, suggesting reduced dependence on exports for volume growth,” said the note.
Ambit forecasts utilization approaching 86 percent on an effective basis by FY23E (vs 82% in FY20E), driving profitability.
Valuations:
Both Tata Steel and JSW Steel provide significant earnings growth through cycle. Ambit’s FY21E estimates for Tata Steel and JSW Steel are 10 percent below consensus on conservatism around demand destruction, but a quick V-shaped recovery could provide upside to our expectations.
“We anticipate stronger growth in FY22, with EBITDA estimates 3-5% above consensus. Both Tata Steel and JSW should generate >20% EBITDA growth through FY22, TSL on operating leverage and JSW on higher Dolvi volumes. Current valuations suggest peak earnings in FY22 10-15% below our expectations,” said the note.
Ambit sees Tata Steel as trading stock, while JSW Steel as a long-term play. Risks to the thesis include greater and longer than expected impact from Coronavirus, shallower than anticipated Chinese stimulus spending, and lower Indian steel demand growth necessitating higher dependence on exports.
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