Shares of Tata Steel and JSW Steel are among the favourite picks of investors considering their brand image and size of their operations in the industry. While Tata Steel is the metal arm of the renowned Tata Group, JSW Steel is the flagship firm of the JSW Group. Tata Steel is the largest private sector steel producer in India followed by JSW Steel.
However, both firms have been affected by the imposition of 15 per cent export duty on several finished steel products with effect from May 22. The duty took a toll on steel exports in July, which fell 75 per cent year-on-year (y-o-y) also led by seasonal weakness in demand and global slowdown in the commodity cycle. July was the fourth straight month of fall for Indian steel exports. In August too, steel exports saw a 66 per cent decline YoY to 0.45 million tonnes (mt). Exports in the year ago period stood at 1.33 mt.
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In a report, credit rating agency Crisil said the 15 per cent duty imposed on several finished steel products will lead to 35-40 per cent lower exports at 10-12 million tonne in FY23. Meanwhile, global steel prices are down close to 28 per cent with lockdowns in China impacting global demand.
Crisil said that for the rest of the fiscal, global prices are likely to remain range-bound, amid a lifting of Covid restrictions by China and growing expectations of lower production curbs to meet decarbonisation goals in the second half. This will affect leading domestic steel producers such as Tata Steel and JSW Steel among others. Duty on exports and falling steel prices will impact outlook of these stocks.
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Shares of Tata Steel have lost 20.66 per cent in a year and fallen 7.96 per cent in 2022. Tata Steel stock has declined 28.20 per cent from its 52-week high of Rs 142.62 hit on October 19, 2021.
On the other hand, JSW Steel stock is trading flat on a yearly and year-to-date basis. The stock has declined 15.83 per cent from its 52-week high of Rs 789.95 hit on April 19, 2022. At 12:38 pm today, the Tata Group stock was trading 0.92 per cent lower at Rs 102.50 on BSE. Market cap of the firm stood at Rs 1.25 lakh crore.
JSW Steel stock too was down 1.76 per cent to Rs 663 in the afternoon session.
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On September 26, international brokerage Jefferies maintained a hold rating on Tata Steel with a target price of Rs 95. It raised the target price from Rs 87, implying an 8.8 percent downside from closing price of Rs 104. 25 on September 23.
Steel prices have started rising for the first time since export duty was imposed. But, Jefferies said that it was too early to be conservative. Indian flat steel prices have fallen 19 per cent from June quarter average levels. The international brokerage sees some downside risk as Indian prices are 6-11 per cent above import parity.
Jefferies said it prefers Tata Steel over JSW Steel, considering lower price-to-book valuations and better cash flow outlook. It expects JSW Steel stock to fall over 42 per cent from the closing price of Rs 668.6 on September 23. It gave an underperform rating with a target price of Rs 385 per share for the JSW Group stock.
Here's a look at what analysts said on the outlook of both steel stocks.
Jitendra Upadhyay, senior equity research analyst, Bonanza Portfolio said, "JSW Steel has a better cash conversion cycle of 36 days compared to Tata Steel's 64 days. If we compare both companies on the valuation ratio of price to equity (PE) w.r.t. to industry PE of 6.13x, Tata Steel trades at a PE of 3.17x which shows that Tata Steel is undervalued and has a huge potential to grow. On the other hand, JSW Steel is trading at a PE of 9.71 times indicating that it is overvalued. On the basis of EV/EBITDA also, Tata Steel sounds good as its EV/EBITDA is 2.87 times which is comparatively lower than JSW Steel's 5.98 times. Steel prices fell sharply in June 2022 post imposition of 15 per cent export duty but average realisation stood higher by 6-12% QoQ. The higher than expected realization helped beat consensus estimates. In Q1FY22, domestic steel producers have reported lower margins or lower EBITDA per tonnes with maximum decrease in JSW Steel."
Pranit Arora, co founder & CEO, Univest prefers Tata Steel over JSW Steel.
"Tata Steel looks more attractive at this time. The consolidation of a couple of Tata metal-related companies into Tata Steel will eventually have synergies of scale as well as a wide spectrum of products. If things work well with consolidation, a higher EBITDA/tonne can be expected due to operational leverage. Tata steel's target price is Rs 138 for 3-6 months," said Arora.
Abhijeet from Tips2trade is positive on JSW Steel post technical analysis.
"Even though fundamentally, Tata Steel margins and other important ratios are much better than JSW Steel, technically, JSW Steel looks more positive on the charts. A daily close above 633 should lead to Rs 666-687 in the near term for JSW Steel. Tata Steel needs to close above Rs 101.5 on daily charts for an uptrend up to Rs 104.8-108 in the near term, " he said.
Ravi Singh, vice President and head of Research, Share India is bullish on Tata Steel.
"The outlook of Tata Steel is better than JSW steel from long term perspective. The recent merger of Tata Steel is going to impact the group in a positive manner as it will strengthen the group holding. Also, the amalgamation may prove in more operational efficiencies and collaboration between the entities. Tata Steel is aiming at better facility utilisation and faster execution which if achieved will boost the Tata Steel's growth numbers over long term perspective. Tata Steel's strong cash flow on the back of robust operating performance is posting confidence on its future perspective. The stock may witness lower levels buying for the target of Rs 107 levels in short term and Rs 120 levels in the long term," Singh said.
Ravi Singhal, CEO at GCL said, "According to recent events, Europe is facing a recession as well as an energy crisis, and Tata Steel's exposure is concentrated in Europe. Technically, JSW Steel also appears to be in good shape. In the next six months, you can invest for target of Rs 700 to 800. Maintain a stop loss of Rs 607."
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