Will China's Woes Impact Indian Metal Players? JSPL, Tata Steel, 3 Others Are Top Picks, 15-28% Rise

Indian metal stocks have witnessed a volatile 2023 so far. Year-to-date performance for the metal indexes has been lower, however, in the past six months, the sector has been seeing improvement. India's metal sector plays a pivotal role in fulfilling the nation's increasing infrastructure demands and supporting its evolving manufacturing sector. In a reserch report, Tushar Chaudhari - Research Analyst, Prabhudas Lilladher says that the Indian steel consumption is expected to grow strong 9% to 142mt over FY23-25E, however, the near-term global demand is muted led by weaker China and developed nations' high inflation and higher interest rates conundrum.

However, the analyst believes that Indian metal players are set to shine and would even shrug off the woes in the Chinese market which is the world's largest steel producer. The analyst has also recommended buying 5 Indian metal stocks that have the potential for a 15% to 28% upside ahead.

According to Chaudhari, Indian steel consumption is expected to grow strong by 9% to 142mt over FY23- 25E led by a) GOI's strong focus on building infrastructure, b) recovering automobile industry volumes with rising affordability and electrification trend, c) rising urbanization driving strong volumes in realty sector and d) increasing private capex utilization across industries. Indian steel companies are expected to add ~22mt of capacities over the next two years and drive volume growth.

Further, he explained that near-term global demand is muted led by weaker China and developed nations struggling from inflation and higher interest rates, both peaking out. Though coking coal prices are expected to moderate due to improved supply conditions, Iron ore prices are weak and would trend depending upon China's gradual recovery over the next few quarters.

As Chinese GDP growth is expected to be stimulus and consumption-driven, Chaudhari said, "demand recovery will be slow and steel prices may bottom out as industry is making losses, adding, "With curtailed production in 2HFY24, we expect pricing to get support and thereby Indian players would be ultimate beneficiaries of the same."

Considering strong underlying demand along with healthy growth momentum, he added, "We initiate coverage on Metals sector."

Prabhudas Lilladher's analyst has recommended buying in 5 metal stocks and these are:

JSW Steel:

Chaudhari said, "We initiate coverage on JSW Steel (JSTL) with a 'BUY' rating and target price of Rs926 based on 7x FY25EV/EBITDA."

As per the analyst, JSTL is well-placed to capitalize on strong volume growth in domestic markets over the next two years given a) its brownfield expansion at Vijayanagar to take its total steel producing capacity to ~35mtpa by the end FY24; b) being the lowest cost steel producer in India, fallen RM prices would benefit; c) rising raw material security has led to consistency and yield improvement; d) rising focus on value-added and
specialized portfolio expected to improve product mix and improve resilience for withstanding steel price volatility.

Over the last two decades, JSTL has grown its capacity at a robust 15% CAGR and also gained good market share. He added, "With GoI's focus on infrastructure and overall stronger domestic economy, steel demand is expected to remain high in next few years wherein JSTL would be a key beneficiary. The stock is currently trading at 7.7x/6x EV of FY24E/FY25E EBITDA. Initiate 'BUY'."

Tata Steel:

Prabhudas Lilladher's analyst initiated coverage on Tata Steel (TATA IN) with a 'Buy' rating and SOTP-based TP of Rs137. He said, "We believe Tata Steel India (TSI) is well placed to capitalize on strong volume growth expected in domestic steel markets, while
Tata Steel Europe (TSE) is at an inflexion point as the UK decision is nearing."

Further, he added, "We believe earnings leakage on the consolidated level would stop, even in case of an adverse decision. We expect solid earnings growth over the next few years given a) strong double-digit volume growth potential for TSI post commissioning of 5mtpa KPO II by 1QFY25, b) more clarity on impending decision on TSUK, c) continuous deleveraging without affecting planned capex to keep balance sheet healthy and d) falling coking coal prices and
tight global steel market to keep TSE green (as Netherland operations are profit making)."

With GoI's focus on infrastructure and an overall stronger domestic economy, steel demand is expected to remain high over the next few
years thereby supporting TSI's volume growth. The stock is currently trading at 6.8x/5.0x EV of FY24E/FY25E EBITDA. Initiate 'BUY', as per the analyst.

Jindal Steel & Power (JSPL)

A buy rating for a target price of Rs 812 has been set for JSPL, assigning 6x EV to FY25E EBITDA. The analyst said, " We believe JSP is well poised to take dual benefit of strong volume growth and improvement in product mix over FY23-25E given a) strong 16% CAGR in steel volumes owing to ongoing Angul capacity expansion; b) commissioning of 5.5mtpa Hot Strip Mill (HSM) to improve product mix and increase Flat Products share from c.33% to over 60%; and c) its upcoming 12mtpa pellet plant, 18mtpa slurry
pipeline and four coal blocks to aid margins.

With GoI's focus on infrastructure and relatively stronger domestic economy, steel demand is expected to remain high in the next few years supporting JSP's volume growth and driving earnings growth. Chaudhari added, "We expect Revenue/EBITDA/PAT CAGR of 12%/16%/24% over FY23-25E. The stock is currently trading at 6.4x/5x EV of FY24E/FY25E EBITDA. Initiate 'BUY'."

Jindal Stainless:

The analyst has initiated coverage on the company with 'BUY' rating and target price of Rs484 based on 6.5x FY25EV/EBITDA.

This is because Chaudhari believes that JDSL is well-placed to capitalize on strong volume growth in domestic markets over the next two years given a) its recently completed brownfield expansion at Jajpur is expected to deliver 17% volume CAGR; b) strong Stainless Steel (SS) demand in India due to longevity and corrosion resistant properties; c) strong pricing power demonstrated post-Russian invasion of Ukraine, despite rising raw material prices; and d) all necessary backend infrastructure at Jajpur for future
expansion.

Also, with govt.'s focus on infrastructure and an overall stronger domestic economy, SS demand is expected to remain high over the next few years and JDSL would be a key beneficiary of the same. He added, "We expect Revenue/EBITDA/PAT growth of 16%/30%/33% over FY23-25E."

Hindalco:

Hindalco is recommended as a 'Buy' for a target price of Rs 557.

According to the brokerage, HNDL has stepped up investments in high-margin downstream units of India and the USA, as Novelis has identified an undersupplied North American 'CAN sheet' market that aims to cater for an indigenous market.

"We believe HNDL is best placed amongst metals peers as a) Novelis is expected to witness gradual improvement in per ton EBITDA over the next few quarters, led by resilient Europe and improving consumer demand from China; b) fall in thermal coal prices and opening of captive coal mines to benefit India business; c) rising focus on high margin Value added products; and d) balance sheet to remain healthy despite significant capex," the analyst added.

Additionally, he said, "We expect consolidated EBITDA CAGR of ~10% over FY23-25E and similar EPS growth on flattish LME price assumptions and Novelis FY25E EBITDA of USD500/t."

In a months span, JSW Steel has risen by nearly 16% on BSE, while Tata Steel has jumped over 13.1%. Similarly, JSPL shares rallied by at least 19.3%, and Hindalco stock climbed nearly 12%. But it would be Jindal Stainless's share price among the top picks that have outperformed both the metal index and its peers by skyrocketing nearly 56% in six months period.

Year-to-date, BSE Metal has dipped by 88.05 points or 0.41%, while the Nifty Metal index has nosedived shockingly by 353.35 points or 5.13%. But data also showed that in six months, the sector has seen rapid rallies as the BSE Metal and Nifty Metal index have soared by nearly 12.5% and 24% respectively.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.