Jefferies Upgrades Tata Steel, Hindalco As It Turns Positive After Year Of Caution
Tata Steel is Jefferies top pick with valuations close to long-term averages.
Jefferies turned positive on Indian metals after almost a year of cautious view as Chinese policies become more supportive of its ailing property sector.
The brokerage upgraded the ratings of Tata Steel Ltd. and Hindalco Industries Ltd. from "hold" to "buy", with Tata Group company remaining its preferred pick.
"China has started to ease Covid policy and support its ailing property sector," Jefferies said. "We believe the worst margin quarter for Indian steel and a significant portion of earnings cuts for Tata Steel and Hindalco are behind us."
Tata Steel's valuation is close to its long-term averages, which are "attractive amid its improving asset footprint and balance sheet", the brokerage said.
"We believe Indian steel margins for Tata Steel and Jindal Steel & Power, which have fallen for the last five quarters, should improve as the steel price holds up and the benefit of lower coking coal costs flows through," the brokerage said. "At Hindalco, Novelis margins are expected to worsen in the second half of FY23, but this has already been factored into our estimates."
However, Jefferies cut FY23–24 earnings per share estimates for Tata Steel, Jindal Steel, and Hindalco by 15–80% over January–November 2022, but said it "believes the big downgrades are behind".
Jefferies finds Tata Steel most attractive in terms of valuation, with the stock trading at its long-term average price-to-book and enterprise value-to-invested capital multiples. Rising share of higher-margin India business in volumes and continued deleveraging goes in its favour, according to Jefferies.
Hindalco is "also reasonably priced", but Jindal Steel and Power Ltd. is "expensive", according to Jefferies.
It's "time to buy" after having turned cautious in January last year, Jefferies said. "The landscape has shifted now, with China's policies becoming more supportive and the large earnings cuts for Tata and Hindalco behind us," Jefferies said. "We believe a sequential improvement in quarterly Ebitda trend for Tata Steel and Hindalco in 2023 will help drive stock performance."