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At spot prices, we see the largest upside skew to FY27E earnings in ferrous, with HRC/Rebar at Rs63,900/62,100/t vs our base case of Rs56,400/52,500/t, implying 10-20% upside to FY27E EBITDA across our ferrous coverage if prices sustain. The recent recovery from July lows, gradual absorption of excess supply, and rising raw material costs support current pricing, although further upside would require a more favorable supply-demand (s/d) balance. In contrast, non-ferrous offers a more subdued skew, with VAML/NACL providing ~1%/7% EBITDA upside at spot prices, while HNDL remains broadly balanced due to hedges. Valuations remain supportive of selective ferrous exposure, with the sector trading at 5.5-7.5x FY28E EV/EBITDA vs 4.4-5.6x for non-ferrous. We prefer TATA in the near term, given lower earnings sensitivity to 2Q trough rebar prices and improving EU outlook, while JINDALST and JSTL are our preferred medium-term plays on volume and pricing. SAIL offers the highest operating leverage but a less compelling risk-reward at current valuations. Within base metals, VAML remains our preferred exposure, followed by HNDL. Overall, we favor selective stock picking over a broad-based sector call, with steel price sustainability, domestic s/d, and raw material costs as key ferrous monitorables, while aluminium s/d remains the key non-ferrous variable.

Ferrous offers greater earnings skew; non-ferrous more subdued

At current spot prices, we see the largest upside skew to FY27E earnings in ferrous, with steel prices currently tracking at Rs63,900/62,100/t above our base-case assumptions for HRC and Rebar at Rs56,400/52,500/t, implying 10-20% upside to FY27E EBITDA across our ferrous coverage, assuming current prices sustain through FY27. The recent recovery from July lows, coupled with the gradual absorption of excess supply and rising raw material prices, supports the current pricing scenario. In contrast, non-ferrous offers a more subdued earnings skew, with VAML and NACL providing ~1% and ~7% upside to FY27E EBITDA, respectively, at spot prices, while HNDL remains broadly balanced due to hedges. Our estimates already incorporate supportive commodity prices, limiting incremental upside; NACL offers greater sensitivity to aluminium prices, while VAML remains the most leveraged to a higherfor-longer commodity environment.

Valuations increasingly differentiate the opportunity

The valuation setup also favors ferrous, in our view, as the stronger earnings skew provides greater scope for earnings-led re-rating, although this is partly offset by the recent recovery in steel prices, which has already driven a meaningful re-rating across the sector. At CMP, our ferrous coverage trades at 5.5-7.5x FY28E EV/EBITDA, vs 4.4- 5.6x for non-ferrous. While non-ferrous valuations are supported by strong cash generation and balance sheet improvement, further re-rating would require aluminium prices to remain above our estimates or a structural improvement in earnings expectations. For ferrous, the key debate is shifting from whether earnings have troughed to the magnitude and durability of recovery. If steel prices sustain above our base case, the resulting earnings upgrades could provide further valuation support despite the recent re-rating.

Outlook and picks: earnings revisions hold the key

Within ferrous, we prefer TATA in the near term, given its relatively lower earnings impact from the 2Q trough in rebar prices and an improving earnings outlook for its European operations. For the medium term, JINDALST and JSTL remain our preferred plays, offering the strongest combination of volume growth and pricing leverage. While SAIL provides the highest operating leverage to recovering rebar prices, with prices now at ~Rs63,000/t, we do not find the risk-reward compelling at the current valuation. Within base metals, VAML remains our preferred exposure, offering a favorable risk-reward supported by elevated aluminium prices and its backwardintegrated, lower-cost operating base. HNDL follows, with an improving Oswego outlook and healthy India operations providing scope for further earnings upside. Overall, we prefer selective stock picking over a broad-based sector approach, given the varying degrees of earnings sensitivity and valuation support across the space. Key monitorables for ferrous remain the sustainability of the recent steel price recovery, domestic supply-demand balance, and the trajectory of raw material costs. For nonferrous, the key monitorable remains the aluminium supply-demand balance, particularly as elevated prices could incentivize an incremental supply response. Akhilesh Kumar akhilesh.kumar@emkayglobal.com +91-22-66121262 Vishesh Dhoka vishesh.dhoka@emkayglobal.com

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