The metal index added over a percent and outperformed all other indices in the morning session on the first trading day of the new year on January 2. Nifty metal was up 1.5 percent at 09:50am after Jefferies turned positive on the sector.
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.
Jefferies believes 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.
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"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.
Big earnings cuts for Tata Steel, Hindalco behind
"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 percent over January-November, but believe the big downgrades are behind," Jefferies said in its report.
Valuations most attractive for Tata Steel
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 (10-13 percent in FY24-25E against 8 percent long-term average), rising share of higher-margin India business in volumes and continued deleveraging.
Also read: Nifty to break its January jinx of trading in the red, optimism rules the market this time
Hindalco is also reasonably priced at 1.1x FY24 PB (11-12 percent FY24-25 ROE) and 1.1x FY24 EV/IC against long-term average of 0.8x PB (9 percent RoE) and 0.9x EV/IC. However, we find JSPL expensive at 2.4x FY24 PB (12-13 percent FY24-25 RoE) and 1.6x FY24 EV/IC against long-term average of 1.5x PB (12 percent RoE) and 1.1x EV/IC, the brokerage firm said in the report.
Time to Buy
We turned cautious on Indian steel in January 2022 as we believed the earnings cycle was inflection-down while market was too optimistic on a China stimulus. We find the landscape flipped now with China policies turning supportive and the big earnings cut for Tata Steel and Hindalco behind. We believe a sequential improvement in the quarterly EBITDA trend for Tata Steel and Hindalco in 2023 will help drive stock performance, it said.
Jefferies has upgraded Tata Steel and Hindalco from 'hold' to 'buy' and has retained 'hold' on Coal India.
At 10:07am, Tata Steel was quoting at Rs 116.45, up Rs 3.80, or 3.37 percent on BS. It has touched an intraday high of Rs 117 and an intraday low of Rs 113.75. Hindalco Industries was quoting at Rs 482.05, up Rs 8.80, or 1.86 percent. It has touched an intraday high of Rs 488.10 and an intraday low of Rs 475.
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