JP Morgan sees over 40% upside in Tata Steel; should you invest?

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Global brokerage firm JP Morgan revised the target price upward for Tata Steel, citing higher earnings for steel companies than in the past decade owing to China’s decarbonisation efforts. The overseas investment firm has fixed the March 2022 price target at Rs 1,250 for Tata Steel (up from Rs 1,100 earlier).

Shares of the company traded 0.38% higher at Rs 886.20 at around 11.56 am (IST). On the other hand, the benchmark BSE Sensex was down 1,118 points, or 2.33%, at 47,695 at around the same time.

Management of Tata Steel highlighted that India business remains strong, and most price hikes should flow through to the bottom line. With coking coal prices depressed and global steel markets tight, Tata Steel expects higher margins in the March quarter than in the December quarter and June to be even better than March.

“Tata remains focused on debt reduction and balance sheet repair, and we see another four quarters of large debt reduction ahead. Management believes the steel cycle has likely reset higher against the last decade, given the global focus on carbon and emissions. We increase our FY22-23 EPS (earnings per share) estimates by 16-17%,” JP Morgan said in a report.

JP Morgan further added that Tata highlighted that the steel cycle has likely reset higher from the previous decade, given China’s focus on reducing emissions, which means lower steel exports out of China and the global focus on emissions, which means that regions with excess capacity, like Japan, are not bringing blast furnace capacity online.

The overseas firm believes that investors will eventually have to re-rate this new normal, and JP Morgan’s FY22 estimates reflect what the financial firm believes the new normal is. “Tata’s around 10MT Europe capacity base offers investors a large delta to earnings in this upcycle that has not been priced in,” JP Morgan said.