2 metal stocks to buy despite valuation, demand concerns

Nomura India in its latest note on steel sector said India steel companies are in a sweet spot in the global metals sector, as they operate at the low end of the global cost curve, largely driven by their lower labor costs, with their iron ore costs also remaining low against other countries. 

Metal companies globally have generated far superior returns post-Covid than in previous cycles, and as a result their valuation multiples have re-rated for the sector. While the commodity space has entered a downturn largely due to weakened global demand and there are debates over whether the multiples should de-rate, Nomura believes that there are structural reasons for metals, especially India steel majors, to continue to trade at higher than historical levels.

It has initiated coverage on JSW Steel Ltd and Jindal Steel & Power Ltd with a 'Buy' rating on account of strong domestic demand, cost saving measures and cyclical recovery. Its target price for JSW Steel at Rs 1,220 and JSPL at Rs 1,200 suggest 22 per cent and 17 per cent upside potential for the two stocks.

"While we expect trough Ebitda per tonne levels in the next two quarters, we remain constructive on India steel names," Nomura India said.

Factors such as higher return on equity (ROE) against previous downturns, continued deleveraging, increased domestic demand that reduces exports dependency, improved incremental ROCE on brownfield expansion, and global monetary easing warrant higher valuation multiples are seen helping steel stocks sustain high valuations.

" With China’s HRC margins treading at historical trough levels, we expect the margins to improve; recent monetary easing measures announced should aid demand recovery, in our view. We believe the historical 0.5x P/B trough should find a much higher floor, closer to the historical mid-cycle level of 1.0x," it said.

JSW Steel Ltd
Nomura India suggested a 'Buy' on the stock, citing upcoming capacity which will align with cyclical recovery -- 7 mt by FY28 at a 5 per cent CAGR over FY24-28. It cited raw material backward integration and said the company is better placed than integrated players. Nomura said its FY25 Ebitda estimate is 4 per cent below Bloomberg consensus on near-term commodity price deflation, but its FY26 estimate is 16 per cent above consensus owing to stronger domestic demand and improved China export HRC (hot rolled coil) spreads. 

"We derive a target price of Rs 1,220 by applying 7.6x one-year forward EV/Ebitda on FY26F estimates, higher than the historical mid-cycle multiple of 7.0x. Risks: Lower spreads, further delays in Dolvi commissioning and demand disruptions," it said.

Jindal Steel & Power Ltd 
The broking firm cited upcoming capacity addition of 6.3 mt by FY27 at an 18 per cent CAGR over FY24-27, which should increase the share of flat products in JSPL's  volume mix (around 65 per cent post-expansion against less than 20 per cent in FY23. It sees enhanced raw material integration through newly acquired thermal coal mines and possible cost reduction after the commissioning of pellet and captive power plants. 

"Our FY25F Ebitda  is largely in line with the Bloomberg consensus, but we are 15 per cent above consensus for FY26E on potentially stronger domestic demand and improved China HRC (hot-rolled coil) export spreads. We arrive at our target price of Rs 1,200 by applying 7.6x one-year forward EV/Ebitda(higher than historical mid-cycle multiple of 6.0x) to JSPL's FY26F EBitda. Key risks: Further delay in expansion, capex cost overruns, lower spreads, and demand disruptions," it said.