Tata Steel at Rs 150? Why are Jefferies, ICICIdirect positive on this stock

Tata Steel valuations are attractive with the stock trading at its long-term average P/BV and EV/IC multiples of 1 time despite higher ROE, rising share of higher-margin India-business in volumes, and continued deleveraging, Jefferies said.

While Jefferies has turned positive on Tata Steel and has suggested a 12-month target of Rs 150, ICICIdirect also sees a building up of momentum on the steel counter. This brokerage, based on technical and fundamental reasons, sees the stock at Rs 127 in coming months.

On the technical side, ICICIdirect said Tata Steel’s share price is seen resolving out of six months base formation, which resembles a Cup and Handle bullish formation. It said the stock has formed a strong base around Rs 100 over the past few months, factoring in a host of negatives. The brokerage said last week's price action formed a Bullish Engulfing candlestick that led to a breakout above its six month’s range,  indicating a revival of the positive trend.

ICICIdirect expects Tata Steel to head towards Rs 127, which is 80 per cent retracement of April–June 2022 decline (R138-83) over the next few months while strong support is placed at Rs 98. Among oscillators, weekly RSI has generated a bullish crossover recently, thus validating the positive bias.

On the fundamental side, China reopening its economy bodes well for the steel sector as it would aid pickup in economic activity thereby aiding in revival of demand.

"Improvement of Chinese economic growth in general augurs well for global steel demand. Over the last one month Chinese steel prices have witnessed an uptick of 10 per cent to $600/tonne, uptick in global steel prices augurs well for Tata Steel," it said.

China export HRC (flat) steel price fell 40 per cent from $860 in April 2022 to $515 in November 2022, but has since recovered to $595 with rising optimism of recovery, Jefferies said in a note. Indian HRC steel price fell 14 per cent and were in line with landed Chinese imports, Jefferies said.

"After almost a year of cautious view, we turn positive on India metals. China has started to ease Covid policy and support its ailing property sector. We believe worst-margin quarter for Indian steel, and the big chunk of earnings cuts for Tata Steel and Hindalco are behind," Jefferies said.

Jefferies said it likes Tata's improving asset footprint with share of India in total volumes up from 33 per cent  in FY15 to 62 per cent in FY22. Tata's 5mtpa brownfield expansion should also start contributing to volumes by FY25, it said, adding that the brokerage expects share of higher-margin India-business in Tata Steel's consolidated volumes to rise to 67 per cent by FY25E.

"We expect Tata Steel to generate negative free cash flow (after interest payment) in FY23 with NINL acquisition and working capital outflow, but see this turning positive in FY24-25E to Rs 11-13 per share," it said.

"We find Tata Steel's valuations attractive with the stock trading at its long-term average PB and EV/IC multiples of 1 time despite higher ROE (10-13 per cent in FY24-25E vs 8 per cent long-term average), rising share of higher-margin India-business in volumes, and continued deleveraging," Jefferies said while updating its call on Tata Steel to 'Buy' from 'Hold' earlier

Meanwhile, IDBI Capital said the immediate near-term outlook looks weak for steel companies. It noted that Chinese HRC prices have fallen 23 per cent in the last one year against 15 per cent fall for domestic HRC prices.

There are chances of recessionary environment in developed countries in the coming one year, it said, adding that even Chinese economy has weakened due to imposition of lock downs in various parts of the country lately.

"Hence, despite export duty reversal, we maintain our Neutral stance on the sector," it said. The brokerage has 'Hold' ratings on Tata Steel and JSW Steel and sell ratings on SAIL and Jindal Steel & power.

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