Metal sector: ICICI Securities upgrades Tata Steel, JSW Steel to ‘Buy’; check top picks in the sector

The Indian steel companies seem to be in a sweet spot amid strong domestic consumption growth and diminishing influence of China in world order. The domestic steel sector is entering a period of capacity expansion sans debt growth, and becoming more localised with lower leverage and better returns, which calls for valuation rerating.

For the first time, domestic steel consumption growth was in double digits for three successive years until FY24. In April 2024, despite pre-election concerns, domestic steel consumption growth was a healthy 9.4% YoY at 10.2 mt. 

ICICI Securities expects domestic steel consumption to grow 2x to 210 mt (FY23 baseline) by FY32E. Among steel companies, it expects JSW Steel and Tata Steel to reach 50 mtpa and 40 mtpa of domestic capacity, each by FY30E. It also estimates SAIL to reach 31 mtpa by FY31E.

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Additionally, after 30 years, China’s role in world steel consumption is expected to diminish and India to account for bulk of steel consumption growth from CY20-25E. While China’s steel consumption may progressively fall from peak levels of CY20 by 110-120 mt, in case of India it is likely to grow by 66 mt by CY25. 

“As per our analysis, the link between steel prices of India and China has gone down post Covid-19 due to supply-chain issues, localisation of steel industry and strengthening domestic consumption in India as compared to decline in China. In our view, while India is unlikely to hit either the same pace and quantum of steel consumption growth as China in CY05-CY14, the consolidation in the domestic steel industry has already taken place with four large players and ArcelorMittal/Nippon Steel looking to expand capacity,” ICICI Securities said in a report.

The domestic steel sector is entering a period of capacity increase sans debt growth. Additionally, the bulk of expected capacity increase is brownfield in nature, resulting in progressively improving RoE. 

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“Globally, we are witnessing an increase in protectionism and resource nationalism, resulting in price and demand localisation of steel, unlike non-ferrous, where price is still determined by the prevailing LME prices. Hence, the sector is expected to trade at higher multiples vs past. In particular, we may see higher P/BV multiple as RoE and capacity utilisation improve,” it said.

Upgrade Tata Steel, JSW Steel

ICICI Securities believes JSW Steel is best placed to reap the benefit of consumption growth owing to a well chalked out strategy of reaching 50 mtpa by FY30 and being the first company to commission the additional capacity. 

For Tata Steel, progressive improvement in TSE operations, restructuring of UK operations and largest brownfield optionality among peers (in both flats and longs) are the key advantages. 

“That said, JSPL’s cost efficiencies, capacity ramp up and least leverage among peers make it a compelling bet. Taking cognisance of the upside potential, market cap and earnings/RoE growth, we rejig our key picks in the sector,” the brokerage firm said.

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Top stock pics in metal sector

Its top picks in the steel sector are Jindal Stainless, Jindal Steel & Power and JSW Steel.

Tata Steel: ICICI Securities has upgraded its ratings on Tata Steel to ‘Buy’ from ‘Add’ earlier and raised Tata Steel share price target to ₹200 apiece from ₹150 earlier.

JSW Steel: The brokerage has upgraded the stock to ‘Buy’ from ‘Add’ earlier and raised JSW Steel share price target to ₹1,140 from ₹875 earlier.

Jindal Steel & Power: The brokerage has a ‘Buy’ call and increased JSPL share price target to ₹1,240 apiece from ₹985 per share.

SAIL: It has a ‘Sell’ rating in SAIL shares with a target price of ₹100 per share.

Jindal Stainless: The brokerage maintained Jindal Stainless share price target at ₹955 apiece along with a ‘Buy’ call.

Shyam Metalics: It has a ‘Buy’ call on the stock and increased the target to ₹825 from ₹815 earlier.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.