Why Hindalco is Jefferies preferred stock pick in metal sector
While the backdrop for metals has turned less encouraging in the last 2-3 months, the brokerage finds valuations for Hindalco and Tata Steel still reasonable
With the Evergrande issue and power shortages clouding Chinese metal demand outlook, production cuts and easing policy measures would be key to support market balances and prices, said analysts at Jefferies in a report. While the backdrop for metals has turned less encouraging in the last 2-3 months, the brokerage firm finds valuations for Hindalco, Tata Steel still reasonable.
Share of higher-margin India business in Tata Steel's volumes has also risen and balance sheet is stronger than most of the last decade, Jefferies pointed. However, it prefers Hindalco over Tata Steel, JSW Steel in metals amid heightened metal price uncertainty and cost pressures in steel.
“HNDL (Hindalco) has lower commodity price exposure as its downstream business Novelis contributes around 55% of EBITDA and is seeing strong demand across segments," the brokerage note on Indian metals sector stated. The brokerage's Buy on Hindalco stock comes with a target price of ₹610.
Meanwhile, it has cut Tata Steel's FY22 EBITDA/EPS by 5-8% factoring higher coking coal prices and has reduced target price to ₹1,600 on lower multiples from ₹2,000 earlier. It has also cut JSW Steel's target price from ₹855 per share to ₹785.
Coking coal prices have surged led by acute supply disruptions in Mongolia and Australia. Iron ore prices, conversely, have fallen declined. Tata Steel's India business has captive iron ore and hence, as per Jefferies, would not benefit from lower ore prices but would get impacted by higher coking coal.
JSW Steel's iron ore costs are linked to Indian market prices though and should hence see lower net raw material cost impact, according to the brokerage.
In aluminum, alumina prices are up ~35% since end-Aug to $580/t and a cost push is positive for HNDL as it has 100% captive bauxite in India, it said.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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