Brokerage house ICICI Direct has picked Tata Steel as its top 'gladiator' pick. The brokerage has recommended a buying range of ₹120-124 for the stock with a target of ₹136 (upside 10 percent) and a stop loss of ₹116. The time duration for the recommendation is 3 months.
The metal sector has been in the limelight since the beginning of CY23 amid China's reopening. Steel stocks have remained resilient in the recent market correction and exhibited strength post the Union Budget, noted the brokerage.
Fundamental view
Tata Steel is one of the leading global steel companies with a consolidated steelmaking capacity of 34 MT out of which 20 MT is in India. Indian operations’ key assets viz. Jamshedpur, Kalinganagar, and Dhenkanal have a globally cost-competitive position, aiding overall consolidated EBITDA margins.
The brokerage noted that in FY22, the higher-margin Indian operations accounted for 62 percent of overall sales volumes. Furthermore, in India, Tata Steel possesses and operates captive mines that ensure cost competitiveness and production efficiencies through an uninterrupted supply of raw material, it added.
It pointed out that Tata Steel meets 100 percent of its iron ore requirements in India, through its captive iron ore mines. In the recent Budget, capital investment outlay increased 33 percent YoY to ₹10 lakh crore, auguring well for Tata Steel, it mentioned. As steel is a core sector, reiterating the focus on infrastructure development would aid in increasing domestic steel demand, stated ICICI Direct.
Also, the brokerage highlighted that China reopening its economy bodes well for the steel sector as it would aid a pick-up in economic activity thereby aiding in a revival of demand. Improvement of Chinese economic growth, in general, augurs well for global steel demand, it added. Over the last couple of months, Chinese steel prices witnessed an uptick of 22 percent to $645/tonne. The uptick in global steel prices augurs well for Tata Steel, said ICICI Direct.
Going forward, for Tata Steel's standalone operations, the brokerage expects EBITDA of ₹14,500/tonne for FY23E and ₹16500/tonne for FY24E.
Technical view
Structurally, Tata Steel’s share price is poised for a breakout from key trend line resistance connecting major swing highs of August 2021 and April 2022 signaling a bullish turnaround, said the brokerage. It expects the stock price to outperform in the coming months and currently provides a decent risk-reward setup.
Earlier, in early January 2023, the share price gave a strong breakout from seven months’ base formation and is now witnessing follow-through buying demand at elevated support around ₹115, noted ICICI Direct. Among momentum oscillators, the 14-week RSI is trending up while sustaining above its nine-period average, thus corroborating positive momentum from a medium-term perspective. It expects the share price to head towards April 2022 highs of ₹138 in the coming few months.
Stock price trend
Tata Steel has risen nearly 3 percent in the last 1 year, outperforming by a small measure against the 2 percent rise in Nifty Metal.
The stock has advanced over 6 percent in 2023 YTD.
Business update
While the steel firm has not yet posted its December quarter numbers, in a Q3 business update, it reported that India's crude steel production stood at 5 million tonnes in the third quarter, which was up 4 percent on both year-on-year (YoY) and sequential basis. Deliveries for the quarter stood at 4.73 million tonnes and were up 7 percent YoY, primarily driven by 11 percent growth in domestic deliveries, which also led to improvement in product mix.
For the nine-month period, Tata Steel India's crude steel production and deliveries were up 4 percent on a YoY basis while domestic deliveries were up 10 percent YoY.
During the quarter, Tata Steel Europe steel deliveries stood at 1.96 million tonnes, down on a YoY basis, but up 5 percent on a QoQ basis, it said. Production for Tata Steel Europe was down on both sequential and YoY basis, Tata Steel said.
As far as Tata Steel India segments were concerned, automotive & special products’ segment deliveries stood at 2 million tonnes and were up 7 percent on a YoY basis, surpassing the previous best recorded in 9MFY19.
"For the quarter, deliveries were marginally lower due to a drop in automotive production," Tata Steel said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
