A sharp divergence between steel prices and stock performance is creating what brokerages see as a compelling entry point in the sector. Since the onset of the Middle East conflict, domestic steel prices have risen around 6%, yet shares of JSW Steel and Tata Steel have corrected 9-10%. Jefferies believes this disconnect is unsustainable and presents a clear buying opportunity, especially as earnings outlook remains stronger than consensus expectations.
The brokerage estimates FY27-28 earnings for both Tata Steel and JSW Steel are 6-24% above Street estimates, with scope for further upgrades. The key driver is steel price strength, which has a disproportionate impact on profitability. Jefferies highlights that a 1% increase in steel prices can drive 5-8% EPS upside, while volume changes have a far smaller impact.
China Signals Turning Point
A crucial tailwind is emerging from China, where early signs of demand-supply rebalancing are visible. Steel production has declined in recent months, and export pressures are easing, indicating potential stabilisation in global markets. At the same time, Asian conversion spreads, though recovering, remain 35% below long-term averages.
Jefferies estimates that a mean reversion in spreads could drive another 13% upside in Indian steel prices, providing a fresh leg of earnings upgrades.
Valuations Support the Bull Case
Despite the earnings strength, valuations remain reasonable. JSW Steel trades at 2.7x FY27E price-to-book, whereas Tata Steel is at 2.1x FY27E price-to-book.
Both are above long-term averages, but justified by higher return ratios (17-19% ROE vs 9-13% historically) and improving profitability outlook. The brokerage expects 30-45% YoY EBITDA growth in FY27 for both companies, driven by price tailwinds and operating leverage.
The key near-term risk remains a prolonged geopolitical conflict, which could weigh on global demand. However, Jefferies argues that earnings are more sensitive to price movements than volumes. Jefferies maintains a constructive stance on steel within the India metals space, citing favourable macro dynamics, improving global balance, and strong earnings visibility.
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