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    Why JPMorgan is bullish on Tata Steel, SAIL despite weak China demand

    Synopsis

    The second is the domestic steel demand, which remains robust at this point and is also reflected in the consistent feedback from Indian steel companies in earnings calls. Thirdly, with the removal of export taxes, the export market has opened up, a positive for steel companies

    Why JPMorgan is bullish on Tata Steel, SAIL despite weak China demandReuters
    Steel stocks have been under pressure so far this 2023, with some companies losing up to 7% on a year-to-date (YTD) basis. Investor sentiment for the steel sector remains bearish globally amid concerns over the lack of meaningful demand recovery in China. China produces more than half of the world's steel output.

    But what does it mean for Indian steel companies? JPMorgan believes that Indian steel mills are well positioned in the wake of improving domestic demand, re-opening of export markets, and higher domestic steel prices.

    For Indian steel companies, there are three factors at play. The first is the regional steel prices, which have moved from $575 per tonne to $660 per tonne, and prices are higher in the spot market in US and Europe.

    The second is the domestic steel demand, which remains robust at this point and is also reflected in the consistent feedback from Indian steel companies in earnings calls. Thirdly, with the removal of export taxes, the export market has opened up, a positive for steel companies.

    With the weak third-quarter earnings out of the way and fundamentals improving, JPMorgan sees a positive environment for Indian steel stocks and is overweight on Tata Steel and Steel Authority of India (SAIL).

    State-owned SAIL posted around a 6a 5% fall in its consolidated net profit at Rs 542 crore for the quarter ended December 2022 on account of higher expenses. The total income also fell to Rs 25,140 crore from Rs 25,398 crore in the year-ago quarter.

    However, according to Kotak Institutional Equities, SAIL’s Q3 EBITDA missed estimates by 7%, mainly on weaker realizations.

    "Margins should expand on stronger steel prices in 4QFY23. However, surging coking coal costs suggest recovery could be short-lived. SAIL’s net debt increased further in 3QFY23 or by Rs 12,800 crore in 9MFY23 led by the normalization of working capital. We see SAIL’s deleveraging phase behind us with a Likely restart of growth capex from FY2024E. We maintain "Sell" on the stock," said Kotak.

    Motilal Oswal says headwinds from higher coking coal prices would be offset by higher steel prices, which should keep margins intact. The brokerage retained a "Neutral" stance on SAIL with an unchanged target price of Rs 95, valuing the stock at 5x FY24 EV/EBITDA.

    SAIL is down about 4.44% so far this year on a YTD basis.

    On the other hand, Tata Steel reported a consolidated net loss of Rs 2,224 crore for the December quarter. Revenue from operations, meanwhile, dropped 6% YoY to Rs 57,084 crore in the quarter ended December 2022.

    Centrum Broking expects Tata steel's profitability to improve in the fourth quarter amid higher steel prices in domestic business and losses to reduce at TSE.

    "We believe the company has enough space to expand in its existing area and hence do not foresee any further major acquisition in near future. We recommend Add, with a target price of Rs 118," the brokerage said. Tata Steel has lost about 7% so far this year.

    Meanwhile, Citigroup downgraded JSW Steel to sell from neutral earlier post the December quarter results with a target price of Rs 675. JSW Steel reported an 89% fall in net
    profit at Rs 490 crore for the three months ended December 2022. The company had posted a profit of Rs 4,357 crore in the last year period.

    The global investment bank is of the view that the stock could underperform through China's reopening trade. JSW Steel stock is down over 6% year-to-date.

    (Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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