Tata Steel, Vedanta, Hindalco, Jindal Steel: What metal stocks are pricing in now

Emkay Global in a fresh note on metals & mining sector said the market is pricing in a potential price hike cycle with spread improvement of Rs 3,000 per tonne already baked into estimates for steel stocks. There is a view that the current downturn is transient, Emkay said even as it feels the ferrous outlook is cautious at current prices, implying a sharp downside risk to earnings if the prices remain lower for longer.

In the non-ferrous space, Emkay Global said the market is effectively discounting commodity prices, which are 7.5 per cent lower for Hindalco, 5.2 per cent lower for Vedanta, and 3 per cent lower for Nalco. Net-net, spot earnings indicate upside potential for aluminium equities and downside potential for steel equities, Emkay said.

Among metals & mining shares, the brokerage suggested 'Buy' rating on Hindalco, Vedanta, Nalco, Tata Steel and Gravita India. It has 'Add' rating on JSW Steel and Coal India.  

"In our base case, key ferrous names trade at 6-8x FY27E EV/Ebitda multiples. At prevailing spot HRC and long steel prices, the skew to lower Ebitda implies upward pressure on effective multiples, as earnings compress faster than EV adjustments. We see valuations on spot steel prices reflective of trough-cycle multiples, which are not necessarily expensive even if they appear optically. At spot commodity prices, with the upside/downside skew in Ebitda, non-ferrous equities appear better on a relative basis," it said.

At spot commodity prices, Emkay is expecting an upside skew in non-ferrous earnings, particularly for Vedanta and Nalco with Ebitda upgrade potential of 5.5 per cent and 4.9 per cent, respectively, for FY27E, if spot prices uphold for the entire year. 

In contrast, its FY27 Ebitda forecast for Hindalco is balanced at spot prices against a base case, owing to hedges. 

"The key divergence in earnings momentum of these companies stems from healthy prices for industrial metals. If aluminium, zinc, and silver prices stay higher for longer, near-term earnings would be due for an upgrade and work favorably for stock price performance, in our view. Spot aluminium prices are 3 per cent above our FY27 forecast of $2,700 per tonne, resulting in an upside skew," it said. 

Emkay said the market is factoring in price recovery optimism for steel equities, with a view that the current downturn is transient. 

"We believe the extension of safeguard duty, coupled with the absorption of excess supply, should catapult into a durable recovery in steel prices, following the transient soft patch due to a domestic steel supply-demand surplus," it said.