200-660% Dividends YTD: Tata Steel, JSPL, NMDC Recommended As Buy Amid 6-7% Drop In Steel Prices In Q3FY24

India's steel prices continue to trail southward, which is likely to hit the margins of major companies in the third quarter of FY24. In such a situation, brokerage Kotak Institutional Equities has selected three steel stocks that are attractive to buy. These include steel giants like Tata Steel, JSPL, and NMDC. Interestingly, all three of them are also high dividend-paying stocks in 2023 so far, ranging from 200% to as high as 660%.

Data from Kotak's research report revealed that domestic steel prices remain under downward pressure, with prices down 6-7% in 3QFY24. Higher Chinese export prices have now closed the import parity gap from the peak of 12% in October 2023. Raw material prices, iron ore and coking coal remain elevated in the hope of further stimulus in China and supply disruptions.

Further, the data showed that domestic HRC/rebar prices fell by 7%/6%, whereas Chinese export offers rose by 4.5% in 3QFY24. Meanwhile, domestic prices are now at import parity level versus a peak of 12-13% premium to import parity in October 2023. Also, domestic steel demand remains robust at +16%/15% in November 2023/8MFY24.

Kotak's note said, "In India, high inventory at mills and distribution channels is exerting downward pressure on prices. Higher imports and weaker exports in November 2023 also contributed to inventory pressure. Import bookings have slowed, but prior bookings suggest that the inflow will remain elevated until January 2024. This should keep domestic prices under pressure, despite robust domestic demand."

Moreover, Kotak also expects prices of coking coal to remain elevated in the near term, driven by weather/labor strike-led supply disruptions in Australia and low inventory levels at Indian steel mills. Higher coking coal prices should hit Indian steel companies from December 2023, mainly in 4QFY24.

Also, the brokerage believes that with lower exit prices in 3QFY24 and higher raw material prices factoring in the inventory lag, spreads in 4QFY24 would be under downward pressure. Higher exports to the EU and strong domestic demand should keep volumes strong; however, weaker steel spreads would remain an overhang in the near term.

Hence, Kotak's note said, "We find better risk-reward in ferrous stocks (steel, iron ore) over base metals (aluminium, zinc producers) due to a better growth outlook and upside to margins, given negative spreads in China. BUY JSP, TATA and NMDC; SELL SAIL."

Kotak has set a target price of Rs 800 on JSPL, while Tata Steel and NMDC target price is at Rs 140 and Rs 200 respectively.

Last week, on Friday, Tata Steel's share hit a new 52-week high of Rs 136.70 apiece before ending at Rs 136.40 apiece up by 3.33%. Further, JSPL shares ended at Rs 724.40 apiece, down by 1.5%, and NMDC shares also touched a new 52-week high of Rs 197.75 apiece before ending at Rs 194.95 apiece up by 1.6%.

In the trading week that ended on December 15, Tata Steel's share gained by over 5.3%, NMDC by over 6.6% and JSPL was up nearly 5%.

In 2023 so far, Tata Steel paid up to 360% dividend amounting to Rs 3.6 per share, while JSPL paid about 200% dividend aggregating to Rs 2 per share. Notably, NMDC has paid the highest dividend among them to the tune of a whopping 660% valuing to Rs 6.6 per share.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.