Tata Steel, SAIL top Emkay’s steel picks; brokerage expects up to 29% upside

Emkay Global has identified SAIL and Tata Steel as its top steel stock picks in light of recent policy changes in India and China. These changes include safeguard duties and an anti-involution campaign, both aimed at addressing the supply side of the steel market. 

The broking firm suggests that these developments will likely lead to a tighter pricing range, which may extend earnings duration and boost valuations. A significant factor is the extension of the safeguard duty for three years, expected to result in a partial decoupling of import pricing parity linked to China’s steel prices. This initiative aims to reduce import dependency and stabilize domestic pricing.

Furthermore, the safeguard duty's extension is anticipated to create a more predictable pricing environment. By decoupling from China's volatile steel prices, domestic markets can better align with local supply-demand dynamics. This shift could potentially lead to a reduction in imports, thereby strengthening the domestic supply-demand balance and achieving inventory drawdowns, which would be favorable for prices and profitability.

For Tata Steel, Emkay Global suggested a target price of Rs 185, which hints at 19 per cent potential upside. For SAIL, Emkay's target at Rs 144 suggested 29 per cent potential upside.

China's anti-involution policy is another critical component influencing the steel industry. This policy aims to curb excessive competition by targeting industrial overcapacity through regulatory measures such as environmental standards, production caps, and reduced subsidies. The policy's success could lead to improved profit margins and boosted tax revenues. Emkay Global's research indicates that the policy is already showing progress with expected outcomes such as production cuts and increased industrial profits.

Despite the favourable policy backdrop, domestic steel demand in India remains subdued. The market is hopeful for a recovery post-monsoon, driven by a revival in government capital expenditure and GST recalibration. Emkay Global believes that a predictable price range could add duration to earnings and provide a longer view on profitability for investors.

The focus on integrated players like SAIL and Tata Steel underscores their potential to benefit from these policy-driven changes, positioning them favourably in the currently challenging global steel market. These companies are well-placed to capitalize on the evolving landscape, potentially leading to enhanced investor confidence and sustained growth. Additionally, the strategic positioning of these firms in the market could offer them a competitive edge as they navigate through these policy shifts.