Short Call | Steel joins the casualty list; Tata Power, JSW Steel, HAL and BHEL in focus

The mood in the stock market is upbeat if one were to look only at the stock prices.

“It is not the low multiple by itself that provides unusual opportunity nor the high evaluations that carry excessive risk. It is, rather, that the level of investment anticipations is low on one side and high on the other.” - Arthur Zeikel

The mood in the stock market is upbeat if one were to look only at the stock prices. But, if seen sector-wise, very few industries make for a compelling bull argument. That is not because those sectors are not doing well, or have poor earnings visibility. Just that the market has already factored in 3-5 years of earnings in advance. And that is on a conservative basis.

Yesterday, this column mentioned how the outlook on sectors like banks, pharma, IT, FMCG and cement was cautious at best. Add steel to that list. CLSA has turned bearish on the sector, saying that miners, and not the companies that convert ore to metal, will enjoy a greater share of the profits as steel capacity addition picks up pace.

CLSA’s argument is that while valuations of steel companies have risen sharply over the last year, the spreads—the difference between ore and the finished product—continues to be under pressure. The broking firm does not see that changing for the better anytime soon.

Tata Power (Rs 392, + 3.3%)

The stock was among the prominent gainers on Monday as outlook on the power sector remains bullish.

Bull argument: The stock is among the well-run power utilities. Huge upside in the renewable business in the coming years.

Bear argument: Valuations expensive compared to historical averages for power utilities. Renewable energy business yet to reach 3-4GW

additions/year required to meet FY27 net profit targets, says broking firm Nuvama, adding that falling profits from coal as import prices normalise, will further be a drag on earnings.

BHEL (Rs 265.15, +12.4)

The stock gained on strong volumes with 26 crores being traded.

Bull argument: The company has Rs 1.1 trillion order book. BHEL is the only bidder for construction of NTPC’s Singrauli Super Thermal Power Project worth Rs 17,195.3 crore. Although the company clarified it has not received any order from NTPC with regards to the Singrauli project.

Bear argument: The stock has nearly doubled in the last 6 months and is trading at an expensive valuation. The company also has low RoE. While the order book is strong, analysts have pointed out that the pace of execution, raw material costs and operating efficiencies will be key factors to watch for.

HAL  (Rs 3128, +1.38%)

Morgan Stanley rated the stock an 'overweight' tag after the company clinched a Rs 5,250-crore contract from the defence ministry.

Bull argument: Primary supplier of India’s military aircraft. Long-term and sustainable demand opportunity due to government’s push on indigenous defence procurement. Robust order book with a pipeline of over Rs 2 trillion in the next five years.

Bear argument: Valuations have run up. The stock is fully factoring in all positives and is widely-owned by institutions and retail investors. Any disappointment on execution could make it vulnerable to a sell-off.

JSW Steel (Rs 826, - 2.24%)

Shares of JSW Steel and other major steel players fell after CLSA downgraded its rating on the steel sector. The brokerage downgraded JSW Steel to sell from underperform and cut the target price.

Bull argument: Growing demand in overseas operations, Q3 profit grew 5X.

Bear argument: Inflated valuations, risks to iron ore prices and weak industry spreads.