Julius Baer downgrades Tata Steel to ‘reduce’ despite robust results; finds risk-reward unfavourable

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May 17, 2021 1:10 PM

Tata Steel has been among the darlings of Dalal Street investors looking to bank on the commodity upcycle so far this year. The stock has surged a massive 85% since January end.

tata steel, steel pricesSteel demand is expected to remain strong going ahead. (Image: REUTERS)

Tata Steel has been among the darlings of Dalal Street investors looking to bank on the commodity upcycle so far this year. The stock has surged a massive 85% since January end, to now trade at Rs 1,124 apiece. The Tata Group firm has reported strong revenue growth to support the buying interest and steel as a commodity remains in an attractive position considering global events at this juncture. However, global brokerage and research firm Julius Baer has decided to opt-out of any further rally in the stock and downgraded the stock to reduce rating.

Stock outperforms benchmarks

Although turning away from Tata Steel, analysts at Julius Baer, in a recent note said that Tata Steel is one of the strong plays in India’s steel industry, given its large scale, diversified geographical presence, low-cost domestic operations, and focus on value-added steel. The report came days after Tata Steel reported a 39% increase in consolidated revenue on-year basis and an 11% increase in deliveries in the same period. 

“While upside risks to earnings continue, we downgrade the stock to Reduce with Target price of Rs 1,310 (5.3x EV/EBITDA FY 2023E) as risk-reward has turned unfavourable,” the report said. The stock has outperformed the benchmark indices since the end of March last year. While Tata Steel has zoomed 302% in the time period, Nifty 50 has gained 72% and the Nifty Metal index is up about 200%. The up-move has come as the stock rebounded from the March 2020 sell-off and investors eyeing a favourable cyclical turn.

Steel demand is expected to remain strong going ahead. “Steel demand in India over the long term is likely to be driven by the auto, import-substitution, and consumer durables sectors and public infrastructure spending. Profitability should be higher than historical averages given the demand recovery in the global market along with policy action in China,” the report said.

Other brokerage firms disagree

Domestic brokerage and research firm Edelweiss Securities, however, still remains a believer in Tata Steel. “We believe a favourable steel cycle and Europe in sweet spot will complement the twin focus on growth and debt reduction. Further improvement in European spreads will be positive as it will improve Tata Steel Europe’s cash sustainability,” Edelweiss said. 

Further, Kotak Securities find the risk-reward in Tata Steel to be the most favourable in the sector. “We have increased EBITDA by 39/19% for FY2022/23E and Fair Value to Rs 1,400 on March 2023E on higher earnings and lower debt. We maintain BUY on attractive valuations at 3.6X/4.8X EV/EBITDA FY2022/23E,” they said.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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