With a cloud of Evergrande issue and power outage chinese metal Analysts at Jefferies said in a report that the demand outlook, production cuts and easing of policy measures will be key to market equilibrium and support prices. While the backdrop for metals has become less encouraging in the last 2-3 months, valuations for Hindalco, Tata Steel, a brokerage firm, still find reasonable.
Jefferies pointed out that the share of high-margin India businesses in Tata Steel’s volumes has also increased and the balance sheet is stronger than in the past decade. However, in metals, it prefers Hindalco over Tata Steel, JSW Steel amid uncertainty in metal prices and cost pressure in steel.
“HNDL (Hindalco) has low commodity price exposure as its downstream business contributes around 55% to Novelis EBITDA and is witnessing strong demand across all segments,” said the brokerage note on the Indian metals sector. The brokerage buy on Hindalco stock comes with a target price. NS ₹610.
Meanwhile, it has cut Tata Steel’s FY22 EBITDA/EPS by 5-8% on higher coking coal prices and lowered the target price ₹1,600 on multiples of less than ₹2,000 ago. It has also cut the target price of JSW Steel ₹855 per share ₹785.
Supply disruptions in Mongolia and Australia have pushed up coking coal prices. Conversely, iron ore prices have declined. Tata Steel’s Indian business has captive iron ore and therefore, according to Jefferies, will not benefit from lower ore prices, but will be impacted by higher coking coal.
According to the brokerage, JSW Steel’s iron ore cost is linked to the Indian market prices and hence should see a reduction in raw material cost.
In aluminium, alumina prices have increased by ~35% to $580 a tonne since the end of August and the cost hike is positive for HNDL as India has 100% captive bauxite.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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