Tata Steel shares on a roll! Should you consider?

Of late, metal stocks have been in focus amid hopes of China demand revival. Shares of Tata Steel zoomed over 8 per cent to hit an intraday high of Rs 1196.85 on BSE on Tuesday.

The scrip closed 7.6 per cent higher at Rs 1188.35 against the previous close of Rs 1104.25. With a market capitalisation of more than Rs 1,45,000 crore, the shares stand higher than 5 day moving averages but lower than 20 day, 50 day, 100 day and 200 day moving averages

Should you consider the 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, strong cash flow for TATA will support any downside from current levels, it added.

"The stock trades at 4.3x/4.4x our FY23/FY24 EV/EBITDA estimate. On a P/B basis, the stock is quoting 1.2x/1.1x our FY23/FY24 estimate. We maintain our Neutral rating with a revised SoTP-based target price of Rs 1,440 share (from Rs 1,500 earlier), the brokerage firm said.

Prabhudas Lilladher noted that the continued relaxation of policies for the real-estate sector and front-loading of infrastructure spending reflects visible pressure on Chinese authorities to stimulate economic activity given the meaningful slowdown witnessed over the last couple of quarters and reemergence of COVID-19.

"While concerns on oversupply resulting from contraction in demand were addressed by commensurate curbs on production by authorities. Unlike past, this limited the intensity of Chinese mills dumping steel in export markets. Amid the low competitive intensity of Chinese mills and constrained steel supplies from Russia and Ukraine, abnormal coking coal prices at US$520/t would remain pressure point for earnings of steel companies," the brokerage firm said.

"Notwithstanding that, margins of Indian steel mills are significantly better than historical levels on back of elevated spreads. Underpinned by solid B/S, sound earnings outlook (with FY23e margins lower by 23 per cent over Q4FY22) and attractive valuations, we reiterate BUY with target price of Rs 1,705, EV/EBITDA of 5.7x FY23e," it added.

Axis Securities has 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 house 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 only 0.8x vs 6.1x in Mar’20.

"Tata intends to double its capacity from 19.6mtpa to 40mtpa mainly through organic expansion in India. The management highlighted a lot of optionalities to put capex in capital-efficient and value-accretive ways and is a confidant to enhance capacity through internal cashflows without any issuance of debt," it said.