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CLSA ups target on Tata Steel, Hindalco, Vedanta, JSW Steel; bets on near term metals rally

CLSA ups target on Tata Steel, Hindalco, Vedanta, JSW Steel; bets on near-term metals rally

CLSA ups target on Tata Steel, Hindalco, Vedanta, JSW Steel; bets on near-term metals rally
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By Ankit Gohel  Dec 14, 2020 3:47:17 PM IST (Published)

The metal stocks have shown a significant rally driven by rising commodity prices globally and an improving demand outlook from China. The Nifty Metal has surged over 50 percent since the end of September month.

Metal stocks have rallied sharply since September end, benefitting from rising commodity prices globally amid an improving demand scenario from China. The sectoral gauge, Nifty Metal index, has posted gains of over 50 percent during the period.

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Global brokerage house CLSA in a report notes that reflation and the revaluation of emerging market (EM) currencies (versus the US dollar) have been driving commodity prices higher, along with a demand uptick in China. It expects domestic steel prices to remain resilient in the near term amid an uptick in domestic demand.
“However, we expect prices to cool off and spreads to moderate over the course of 2021. The demand outlook in China following the Chinese New Year will be a key item to monitor. We forecast FY22 spreads to be higher YoY but to be lower than spot,” analysts at the CLSA said in a report.
In a rising commodity price environment, CLSA prefers integrated steel mills such as Tata Steel on its better margin outlook and Hindalco given its resilient earnings outlook.
CLSA raised its steel and metal price assumptions and hence raise its EBITDA estimates for its coverage by 1 percent-19 percent for FY21-23CL.
The brokerage maintained a buy rating on Tata Steel and raised its 12-month target price to Rs 750 per share from Rs 585 earlier. Full iron ore integration in India and rising prices in Europe augur well for Tata Steel’s profitability in the second half, it said.
A potential deal to sell its European assets could be an added positive, though deleveraging is likely to continue even without this, CLSA said in its report.
On Hindalco, CLSA maintained a buy call while raising the 12-month target price to Rs 300 per share from Rs 270 earlier.
“With 79 percent of its Ebitda from conversion businesses, its earnings are likely to be most resilient. The outlook for the key businesses of Novelis (beverage cans & auto sheets) continues to improve. At a 5.4X FY22 EV/Ebitda its valuation remains inexpensive,” CLSA said.
CLSA, however, has a sell rating on JSW Steel albeit on a higher target price of Rs 322 per share from Rs 245 earlier. While capacity additions provide visibility on volume, higher iron ore prices will limit profitability improvement, the report said. Moreover, the completion of the acquisition of Bhushan Power could also be a risk. It remains expensive on both PB and EV/Ebitda, it said.
CLSA maintained an outperform call on Vedanta and raised the target price to Rs 140 per share from Rs 100 as it believes that the focus remains on capital allocation, though higher commodity prices bode well for its earnings.
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