Tata Steel among top metal stock picks as steel finds its spark: Jefferies

Jefferies in its latest note on steel sector said India offers a bright spot in the world largely devoid of volume growth in commodities. The foreign brokerage said domestic steel companies may offer strong 8-10 per cent volume CAGR over FY25-27, with safeguard duty aiding profitability. 

Jefferies called Tata Steel Ltd and Jindal Stainless as its preferred Buys. It also upgraded JSW Steel to 'Buy' from 'Hold', retaining its 'Buy' on Coal India. The broking firm downgraded Hindalco Industries to 'Hold' from 'Buy' on muted earnings growth and rising debt over FY25-27.

"We raise our FY25-27 EPS by 22-29 per cent for Tata Steel and by 23-24 per cent for JSW Steel on higher steel prices; our FY26-27 EPS for Tata Steel is 4-15 per cent above Street estimate. Steel stocks are trading
above last 10-year average PB, but valuations are likely to sustain, given healthy volume growth and potential margin expansion," Jefferies said. 

This brokerage upgraded JSW Steel, but prefers Tata Steel, mainly on valuations. For Tata Steel, the target stands at Rs 200, hinting at 23 per cent potential upside. JSW Steel's target at Rs 1,200, Jindal Stainless' at Rs 800 and Coal India's at Rs 455 suggests up to 23 per cent upside ahead.    

Jefferies said China's 2024 exports of carbon and stainless steel were the highest in a decade, which has been a drag on prices. But Asian conversion spread is 30 per cent below long term-average, and the 18-year history shows favorable risk-reward for owning steel stocks at spot spreads, Jefferies said.

On Hindalco, Jefferies said China has a net deficit in primary aluminum, which supported aluminum prices in 2024. But prices have fallen 9 per cent since mid-March due to tariff concerns.

"We cut Hindalco's FY26-27 EPS by 7-10 per cent on lower aluminum prices and lower Novelis volumes given concerns on US auto and specialty demand," Jefferies said. It believes the stock is not expensive, but is unlikely to perform given lackluster earnings growth and rising debt over FY25-27E. The brokerage suggested a target of Rs 690 on Hindalco.

On Jindal Stainless, the brokerage said it is a leader in India's fast-growing stainless steel (SS) market. 

The company has lower Ebitda per tonne volatility and better balance sheet against Indian carbon steel players, it said.

"FY25 was a tough year for JDSL but a potential expansion in China SS spread can boost JDSL profitability. We expect 10 per cent volume and 21 per cent EPS CAGR with 17 per cent ROE over FY25-27E. Its 11x FY26E EV/Ebitda is reasonable given SS premium over carbon steel globally. We initiate on JDSL with Buy and Rs 800 target," it said.