Multibagger stocks: Rally in these two multibagger steel stocks may not end anytime soon

NEW DELHI: Select steel stocks have rallied up to 8 times in the last two years. Among them, two stocks Tata Steel and Jindal Steel & Power (JSPL) can deliver more, said analysts, who are banking on the export opportunities arising out of Europe. This is even as there are persisting concerns over rising raw material cost, which steelmakers need to pass on to consumer industries sooner than later, analysts said.

Shares of Jindal Steel have climbed 8.4 times since early April 2020 while those of Tata Steel have surged 5.3 per cent during the same period. A median target of 31 analysts on Tata Steel suggests a potential 23 per cent upside. Another such target of Rs 574.71 on Jindal Steel suggests a modest 9 per cent upside. The latest report on this stock, by Motilal Oswal, pegged the stock target at Rs 605.

“This theme (steel) will ride out for the next six months-one year. Nobody knows where the war is going. Indian markets have also stopped reacting to the war news as the market does not react to the same news twice. Make hay while the sun shines. In the next six months-one year, yes this (steel) theme could play out,” Devang Mehta, Centrum Wealth Management told ET NOW.

Russia and Ukraine are the key suppliers of steel in the EU, but Russia is also a major supplier of coking coal and natural gas, thus leading to cost inflation concerns.

Steel prices continue to rise, especially in Europe – up 50 per cent month-on-month on higher energy costs. On the other hand, the rising covid-19 cases in Tangshan province of China has hurt crude steel production, said Edelweiss Securities.

The silver lining for domestic steel companies, it said, is an opportunity to export hot rolled coils (HRC) to Europe at a significantly better realisation of $1,300 per tonnes. In fact, domestic steel companies are not even offering material in Southeast Asia, it noted.

“We remain positive on ferrous and maintain JSPL (target: Rs 637) and Tata Steel (Target: Rs 1,695) as top picks in the space,” Edelweiss said.

Russia and Ukraine accounted for 21 per cent of EU steel imports in 2020 and 2021 and the ongoing war could lead to a sharp rise in steel prices in the EU region.

“This also opens up export opportunities for steel players in India. These factors seem to be playing out as well, in our view,” Nomura India said.

At the same time, disruption in Russian coking coal supplies, which account for 10 per cent of global trade and natural gas supplies (accounting for 41 per cent of EU supplies in 2019) could lead to input cost inflation for both blast furnaces (BF) and electric arc furnaces (EAF).

Edelweiss said major steel players have taken a hike of Rs 1,500 per tonne for flats and Rs 1,250 tonne for longs, on average. Besides, steel players are invoking the force majeure clause in contracts owing to the sustained high price of coking coal.

“While the traders’ market has barely reacted, as it is operating at a premium of Rs 2,000 per tonne, we see that the price hikes being absorbed mainly as imports are still not viable. While Q4FY22 margins appear to be relatively stable due to lower inventory cost, we see margins in H1FY23 impacted if coking coal prices continue to stay elevated,” Edelweiss said.

IIFL said it prefers steel players with raw material integration – i.e. JSPL and Tata Steel – even as it lowers its target multiples to reflect the uncertainty. This brokerage has a target of Rs 1,592 on Tata Steel and Rs 604 on JSPL.

Tata Steel traded at Rs 1,354 a piece in Friday’s trade. JSPL quoted at Rs 530.60 apiece.

Analysts said while exports are an opportunity, 3.54 million tonnes of steel exports to the EU accounts for just 3 per cent of Indian production.

“With some relaxation in EU import quota in March, Nomura expects Indian steel exports to EU to rise, but would still account for less than 5 per cent of Indian production in FY23. Thus, for robust Ebitda margins for the steel industry, we think domestic price hikes are essential,” Nomura said.

Sudip Bandyopadhyay of Inditrade Capital said JSPL or even Tata Steel do look good, even at current levels, if somebody has a slightly longer-term horizon in mind.

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