Metal stocks to buy: Coronavirus scare has some positives for Tata Steel, JSW Steel

Ambit Capital has initiated coverage on Tata Steel and JSW Steel with ‘buy’ ratings citing expected stimulus by China, credit impulse and continued global liquidity. The brokerage said there could be demand destruction in the near-term on account of Coronavirus but it expects a ‘supportive environment’ for metals from the second- half of 2021. Shares of Tata Steel dropped 6.4%, while JSW Steel slumped 8.1% on Monday as worries about Coronavirus spreading weighed on sentiment. “As an early cycle metal, steel stands to benefit the most from Chinese infrastructure spend. Global cyclical recovery and restocking should provide added support,” said Ambit.

Tata Steel
CMP: Rs 415.35

Ambit’s Target Price: Rs 550

Expected Returns (%): 32%

“Tata Steel, with significant operating and financial leverage, could significantly improve RoE (return on equity) on cyclical recovery in global pricing and improved Indian supply/demand,” Ambit said. The brokerage said steel maker’s net debt will remain high and Europe will remain fragile but its Indian operations would make up for these vulnerabilities. The stock is trading at 0.6 times FY20 price to book – the lower-end of its 10-year range.

JSW Steel
CMP: Rs 258.80

Ambit’s Target Price: Rs 350

Expected Returns (%): 35%

The brokerage said despite higher iron ore costs post Odisha auctions, the company’s consolidated operating profit would grow from Rs 130bn in FY20E to Rs 215bn by FY22E (29% CAGR) led by volume growth and margin expansion. “Commissioning of 5MT Dolvi expansion in 1HFY21E should again coincide with cyclical recovery by mid-FY21,” the brokerage said. “Higher volumes, better mix should drive earnings growth through the cycle.”