Tata Steel shares on a roll! Should you consider?
Metal inventories have been in focus lately on hopes of a pick-up in demand in China. Shares of Tata Steel soared more than 8% to hit an intraday high of Rs 1196.85 on BSE on Tuesday.
The certificate closed up 7.6% at Rs 1188.35 against the previous close of Rs 1104.25. With a market capitalization of over Rs 1,45,000 crore, the shares are above the 5-day moving averages but below the 20, 50, 100 and 200-day moving averages.
Should you consider stock?
Motilal Oswal is cautious on steel demand in India at current steel prices. With the onset of the monsoon over the next two months, steel prices are set for a correction. However, TATA’s strong cash flow will support any downside from current levels, he added.
“The stock is trading at 4.3x/4.4x our FY23/FY24 EV/EBITDA estimate. On a P/B basis, the stock quotes 1.2x/1.1x our FY23/FY24 estimate. We maintain our neutral rating with a revised SoTP. -Target price based on Rs 1,440 per share (from Rs 1,500 earlier), the brokerage firm said.
Prabhudas Lilladher noted that the continued easing of policies for the real estate sector and the frontloading of infrastructure spending reflect visible pressure on the Chinese authorities to stimulate economic activity given the significant slowdown observed over the past two quarters and of the re-emergence of COVID-19.
“While concerns about oversupply resulting from shrinking demand have been addressed by proportional production restrictions by the authorities. Unlike in the past, this has limited the intensity of Chinese mills dumping the steel in export markets Amid weak competitive intensity from Chinese mills and limited steel supplies from Russia and Ukraine, abnormal coking coal prices at US$520/t would remain a point of pressure for steel company profits,” the brokerage firm said.
“Notwithstanding this, Indian mill margins are significantly better than historical levels thanks to high spreads. Supported by strong B/S, good earnings outlook (with FY23e margins 23% lower than Q4FY22) and attractive valuations, we reiterate BUY with a target price of Rs 1,705, EV/EBITDA of 5.7x FY23e,” he added.
Axis Securities also maintained its bullish stance on steel major Tata Steel. It has a “Buy” rating on the stock with a target price of Rs 1,700.
The brokerage noted that the company’s net debt fell more than expected to Rs 51,049 crore due to better working capital management. Net debt/EBITDA now stands at just 0.8x compared to 6.1x in March 2020.
“Tata intends to double its capacity from 19.6 mtpy to 40 mtpy, primarily through organic expansion in India. Management has highlighted numerous options to place capital expenditure effectively in terms of capital and value added and is confident of improving capacity through internal cash flow without any debt issuance,” he said.