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Shares of Tata Steel are on a tear ever since the outbreak of Covid-19. On March 24, 2020, the day India went into lockdown Tata group’s flagship company Tata Steel ended at Rs 271.75 apiece fast forward today the stock is trading at Rs 1,234.85 per share, galloping 4.5 times over the last 16 months. The stock has outperformed the Nifty Metal index that delivered a return of 249% compared 354% garnered by the stock during the same period.
Despite such a strong rally in the counter analyst on the street are upbeat about the stock. JP Morgan has recently released a report on the stock with an overweight rating and price target of Rs 1,610 per share implying an upside of 30% from current prices.
“While markets appear to be expecting a sharp steel price correction, steel prices continue to move higher. Landed steel prices are in the range of Rs 78,000-82,000/t (tons) vs the domestic price of Rs 67,000/t. While there remains a high degree of skepticism on steel profits, the ‘new normal’ for steel earnings is higher than in the last decade owing to China’s decarbonization efforts,” noted JP Morgan in a report.
The global brokerage firm is of the opinion that investors will eventually have to re-rate this new normal, and its FY23 estimates reflect what it believes is the new normal. Tata Steel’s ~10MT (metric tons) Europe capacity base offers investors a large delta to earnings in this upcycle that has not been priced in, their view.
It sees asymmetric risk/reward in Tata Steel if steel prices are steady post-October. Chinese steel production has fallen in June and July and prices have inched up; this creates the risk of Indian steel prices moving higher post-October v/s a large decline that the markets are currently pricing in. In a scenario of muted price decline, the brokerage house sees a 50% upside to its FY23E EPS (earnings per share).
The key downside risks to its rating and price target include a sharp decline in steel spreads (>50%) and a sharp decline in steel demand in India.
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