Monsoon likely to trigger tractor demand: PhillipCapital

With the onset of monsoon, all eyes are set on agriculture and consumption-led stocks in areas like consumption, automotive and more. In an interview to CNBC-TV18, Dhawal Doshi, Analyst - Metals, Mining and Auto, PhillipCapital, is bullish on the tractors segment.He said it is best to play in the tractors as the segment will witness a good growth if the monsoon is good. Consequently, Escorts' stock should benefit from the monsoon, he said.Doshi said he expects stocks of Tata Steel and JSW Steel to rise on account of company-specific events and steel ministry's likely extension on minimum import prices. In the mining segment, he is positive on Vedanta and Hindalco.Below is the transcript of Dhawal Doshi’s interview with Nigel D’souza and Reema Tendulkar on CNBC-TV18.Nigel: Let us start with the non-ferrous space. Let us talk about Vedanta. That stock has close to have doubled from the lows that we saw earlier this year. What is your take on this stock, what is your outlook how much more upside do we have to go there? What are the key triggers?A: We are positive. We are looking at a target price of close to Rs 125. So, in general, the rebound in the commodity prices that we have seen, is what is driving Vedanta. So Vedanta is exposed to a good amount of ferrous as well as non-ferrous commodities. Iron ore prices have bounced back, aluminium, zinc prices have bounced back and so has crude. So, as long as the commodity prices are moving up, we are looking further in Vedanta.As far as Vedanta is concerned, two specific things, which will drive is the oil prices and the zinc prices. So, with a good chunk of valuation coming from these two segments and both the commodity prices moving up, the outlook continues to be positive for Vedanta.Reema: Steel stocks have done well, in fact, JSW Steel today has hit a fresh 52-weeek high. Tata Steel has seen a strong pull back from its lows that it hit in February. All this is courtesy the minimum import price (MIP), which was introduced in the month of Feb. Now the timeline of it is only six months. How long do you think it will get extended? What are your current estimates factoring and therefore, take us through how you should approach the stocks after the run up.A: We are looking at an additional extension of six months. In fact, the steel ministry has already requested for the extension of MIP till the time the anti dumping studies are not concluded. So, we are building in the extension of MIP that is going to be happening for an additional six months post August.Reema: So, there is still upside in steel names like Tata Steel and JSW Steel?A: As far as steel prices are concerned, I am not expecting any further run up in prices. Probably we could see some softness depending on the demand and the lean period, but as far as the stock prices for Tata Steel and JSW Steel are concerned, I am still expecting company specific events happening, which would drive the stock prices up, both for Tata Steel as well as JSW Steel.Nigel: You were talking about MIP getting extended to the end of this year. Give our viewers a sense, what is the exact global prices currently. What if MIP went out of the window and today, we had to import steel. What would the price of landed steel be and just compare it to the current domestic prices as well?A: If you were to look at the international hot rolled coil (HRC) prices, they ran up from a bottom of about USD 260 to close to USD 480. From there, they once again started coming down, so currently, they are in the range of USD 340.The current imported steel prices are at a significant discount to what the domestic prices are. But can we import at those prices? No. The MIP is what is restricting the imports, which are happening.So, as far as the domestic price outlook is concerned, I do not expect a significant correction or probably in line with what the international prices have behaved, there could be some marginal downside.Nigel: You are positive both on Vedanta as well as Hindalco. Now, with regard to Hindalco, their aluminium performance was something that surprised the street in the past quarter. What kind of numbers are you working with? Average London Metal Exchange (LME) price for this fiscal could you give us that number and also, could you tell us with regard to zinc prices? Zinc is up by more than 20 percent in 2016. So, what are the average prices you are factoring in for both, aluminium as well as zinc?A: For aluminium, I am working with an LME of USD 1,550 which is what very current LME is. However, as far as zinc is concerned, we are building in USD 1,900 which has an upside risk because if you look at the current LME prices, they are way above USD 2,000.Reema: You also look at the auto space very closely. In that, while the sales momentum has been good in the last few months, everyone is hoping for monsoon to provide that additional kicker. What is the best way to play now the auto sector theme and the monsoon kicker theme?A: As far as monsoons is concerned, my sense is that it is the best to play with tractors because tractors has been down since the past two years. So there is a good amount of latent demand sitting and channel checks also suggest that if the monsoons are normal, you will see a good uptick as far as the overall demand is concerned for tractors.So, we are recommending Escorts as a pure tractor play, which should be a key beneficiary for the overall revival in the tractor industry.Nigel: Tata Motors has moved quite swiftly. What is the target price you have on that counter?A: I have a target of Rs 530.