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Among base metals, aluminum (alum) remains the best placed and JPM’s Global Commodity team expects alum to be in deficit over 2021-23 and has sharply increased price forecasts. This drives large EPS upgrades across alum stocks (HNDL, NALCO, VEDL), it said in a note. 

“Even as we cut our valuation multiples to adjust for cycle-high alum prices, we see material upside risk to earnings," JPMorgan stated. It has upgraded Vedanta to overweight with a target price of 400 from Neutral and NALCO (TP 104) to Neutral from underweight. It also remains overweight on Hindalco (TP 605) and underweight on Hindustan Zinc (TP 265).

The largest earnings increases are for aluminum-exposed companies such as NALCO and Vedanta (which would also benefit from strong oil prices and elevated zinc prices), and drive our ratings upgrades as well, it said. 

“While Hindalco behaves like an upstream aluminum stock, it is mostly a downstream aluminum company and hence the earnings sensitivity is relatively low vs VEDL/NALCO, hence relatively lower earnings upgrades for HNDL vs VEDL/NALCO," the note stated. 

In JPM's view, while investor concerns remain on Vedanta's cash distribution, given the strong operating environment across key segments, it believes there is upside risk to earnings and cash flows at current LME/oil prices. The stock trades at a material discount to peers, hence JPM believes risk reward is attractive at current levels.

However, the energy situation in China and the rest of the world remains very fluid, meaning price risks for aluminum are very much skewed to the upside, particularly in the near term, JPM’s Global Commodity team in their update highlighted. LME aluminum price forecasts have been increased by 35% for 2022 and 18% for CY23 with upside risks in the near term. 

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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