JP Morgan saw 30% Upside in Tata Steel

There was a sense of irony about the extremely positive buy call on Tata Steel coming from JP Morgan. This comes just a few days after Jefferies had virtually called an end to the steel stocks rally in India. In fact, the latest note by JP Morgan has a lot of bullishness built into it; not only for Tata Steel in particular but also for steel in general.

JP Morgan has given a price target of Rs.1,850 for Tata Steel, nearly 52% above the current market price of Rs.1,211. On Friday, despite the positive call, the stock closed nearly 1% lower on the NSE. JP Morgan is not only positive on Tata Steel, but has also given an aggressive buy target of Rs.165 for SAIL; again a 52% upside from current price levels.

What makes JP Morgan so positive on steel stocks?

JP Morgan feels that the steel stocks like Tata Steel and SAIL have underperformed the indices by 11% to 15% in the last 2 quarters.  As a result most of the short term risks like slowdown in China demand or higher cost of coking coal and other inputs, have been more or less factored into the prices. 

JP Morgan also feels that the Tata Steel was likely to see a turnaround in its fortunes in the coming fiscal for a number of reasons. Firstly, the domestic steel demand in India is seasonally very strong in the March and June quarters. That should favour the steel companies in their mean reversion of values.

The other factor that JP Morgan has pointed is that the EBITDA / tonne, one of the most important metrics for steel companies, had peaked in Jun-21. Subsequently, there was pressure due to higher coking prices and fuel costs. However, that tide has turned and JPM feels that the Mar-22 quarter and the Jun-22 quarters should be value accretive for them.

It is not just JPM. Even Morgan Stanley continues to be very positive on Tata Steel. They have an overweight on steel for 2022 with focus on Tata Steel. According to Morgan Stanley, steel companies will see better operating profits, acceleration in growth and lower credit costs in the coming year. That should be positive.

Where does that leave the investor. Steel remains a good proxy for the India recovery story as well as the global metals demand. Steel is in a upcycle and that cannot be wished away. Of course, it would be wise to consult a financial advisor or a broker advisor before taking a decision to ensure that it conforms with your financial plan.