Global recovery key: Steel outlook improved, but Hindalco top- | DM Stocks

Global recovery key: Steel outlook improved, but Hindalco top-pick (CLSA)

Global newsflows would continue to dominate outlook for the Indian metals sector. A faster reopening in China and stimulus has provided a new lease of life for the sector, although on ground demand improvement is still elusive. Post CNY demand would be key for further rerating. US recession now looks imminent but could be shallower than earlier expectations. While domestic demand is resilient, large steel capacity addition could keep dependence on exports high. We expect steel prices to rise in the near term (in line with or at a discount to import parity) before softening in the following quarters. While we turn incrementally positive on ferrous, we continue to prefer Hindalco over steel names. We upgrade Tata Steel to O-PF and JSPL to U-PF.

Stock calls: Hindalco top pick; worst looks behind for steel companies
While we turn incrementally positive on ferrous, we continue to prefer Hindalco over steel. Rise in steel prices should provide support to steel stocks in the near term, but we expect the excitement to fizzle out in the back half of the year.
We change estimates and TPs to incorporate update price and spread estimates. For steel, while we believe 2QFY23 has seen trough profitability, steady state profitability is likely to be higher than historical median (in INR terms).
Hindalco (BUY; TP Rs580 from Rs515): Resilient aluminium price and lower global cost should support domestic earnings. In the near term, rebound of Novelis’ profitability would be key to watch, while expansion projects are crucial in the medium term.
Tata Steel (up to O-PF, TP Rs135 from Rs90): Biggest beneficiary of a demand drive upcycle in China. Visibility on Kalinganagar expansion and Europe profitability is key.
JSPL (up to U-PF, TP Rs610 from Rs430): Pick-up in domestic infrastructure demand augurs well. Strong medium term capacity addition fairly priced in. Expansion projects would be key to watch for.
Maintain SELL on JSW (TP Rs640 from Rs480); U-PF on Vedanta (TP Rs295 from Rs275).