While Indian metal stocks have underperformed the majority of their global counterparts year to date (CYTD), global brokerage firm Jefferies views this as a buying opportunity.
The brokerage firm has reported that stocks from its coverage universe, such as Tata Steel Ltd, Hindalco Ltd, and JSW Steel Ltd, have lost 5% to 14% in the current year so far, as compared to a fall in the Nifty 50 by 2% in the same period.
Most of the global stocks from the brokerage's coverage gained 5% to 34% in the current year so far.
The overseas operations of Tata Steel, namely Tata Steel Europe and Novelis of Hindalco, disappointed the Street with its Q3FY23 results, but stock underperformance compared to peers globally with comparable underlying exposures seems excessive.
For the quarter ended December, Tata Steel Europe's revenue from operations fell 8.8% on year to ₹20,745 crore from ₹22,769 crore, and slipped sequentially nearly 4%. According to the company, the revenues were lower due to drop in steel realisations, partly offset by 6% quarter-on-quarter (QoQ) growth in deliveries.
In the case of Hindalco, net sales dropped by 3% to $4.2 billion for the third quarter of fiscal year 2023, compared to $4.3 billion in the prior year period.
According to the company's filing, this was primarily driven by lower average aluminum prices and a 2% decrease in total flat rolled product shipments to 908 kilotonnes, partially offset by increased product pricing and favorable product mix.
"For Tata Steel in particular, the European business contributes just ₹11/share of enterprise value (EV) to our price target of ₹145. We see the recent underperformance as a buying opportunity in Indian metals; our top pick is Tata Steel, followed by Hindalco," said the brokerage.
Further, the brokerage claims that India became a net importer of steel in 2HCY22 due to domestic prices being higher than landed imports and the government imposing a 15% export tariff in May 2022. With domestic prices now at a slight discount to imports and government removing the export tax in November, net imports have come down in January.
Asian steel conversion spread also increased from a low of US$185/t in 2QCY22 to US$224/t at spot, and it should continue to increase, particularly if China macroeconomic conditions improve, believes the brokerage.
"Asian steel spreads are still 10% below long-term average though, and we see scope for further expansion," added the brokerage.
China's economic statistics are showing signs of improvement after a weak 2022. Through the majority of 2022, the manufacturing PMI was in contraction zone, but in February it soared to an 11-year high of 52.6.
After declining 13% in 2022, the price of hot-rolled coil (HRC) steel in India has increased 8% CYTD to around ₹60K/t.