From Tata Steel To SAIL: India Steel Valuations Stretched, Says Citi Research

Steel valuations appear stretched, and a broad-based commodity rally is unlikely, according to Citi Research.

A sensitivity analysis for India steel equities has been conducted to incorporate higher domestic steel prices, considering the rally in iron ore. The analysis indicates that Indian steel equities are presently traded within the range of 6.5–8.5 times EV/Ebitda, Citi said in a note on Tuesday.

The research firm did a sensitivity analysis incorporating:

• Domestic steel prices at Rs 57,000/tonne

• Global iron ore prices at $135 (in-line with spot),

• Domestic iron ore prices at Rs 4,860/t (Rs 200/t higher than NMDC's last-announced price)

• Coking coal at $275/t, in line with Citi estimate for 2024 (vs. spot at $325/t)

• Citi volumes as per its estimate for financial year 2026. It incorporated net debt as reported for September 2023.

"In the absence of a notable real-estate recovery in Citi's base case, broad-based commodity rally looks unlikely; reiterate sell despite potential upside for domestic steel prices given expensive valuations", the research firm said.

Citi is bullish on iron-ore price in the near term due to low inventory and expectations of China stimulus.

Upside risks include higher-than-expected domestic steel prices as well as higher-than-expected sales volumes on faster than-expected commissioning of new capacities.

Upside risks include higher steel spreads on stronger-than-expected steel demand in China, rupee depreciation leading to higher steel prices and lower costs of iron ore and coking coal.

Citi Research has a target price of Rs 80 for SAIL. Key upside risks are higher-than-expected steel prices, higher volumes and lower-than-expected wage costs.

Citi values Tata Steel Ltd. at Rs 100 a share. Its multiple is close to Tata Steel's long-term average one-year forward consensus EV/Ebitda.