The Indian market is on a record-breaking spree, with the benchmarks indices scaling new highs powered by sectors like IT, metal and oil & gas.
Among the top-performing stocks of the Nifty, the gains in Tata Steel this year have been a pleasant surprise for investors. The Tata Steel stock has surged 122 percent year-to-date, while the Nifty metal index has clocked a gain of 75 percent. The benchmark Nifty has risen 24 percent during the period.
Such a steep rise in the stock has raised concerns that the stock is overbought and may correct soon. The stock has closed in the red for the last two sessions.
With signs of economic revival and rising steel prices globally, the stock found itself in a sweet spot.
Tata Steel posted a consolidated net profit of Rs 9,768.34 crore for the quarter ended June 30, 2021. The steel giant incurred a net loss of Rs 4,648.13 crore in the year-ago period. Total income zoomed to Rs 53,534.04 crore in the quarter under review from Rs 25,662.43 crore in the corresponding period of the previous year.
Tracking growth
Tata Steel looks on a steady path for the coming quarters as well. The company plans a capital expenditure of Rs 8,000-crore for its India operations year in the current financial year.
In its investors’ presentation on September 6, the company said it intends to reduce its gross debt by more than $2 billion, while prioritising off-shore debt pre-payment in FY22. It is also planning a capital expenditure of Rs 10,000-12,000 crore in the current financial year.
Consolidated net debt of Tata Steel has declined by 28 percent as on March 21 and it is ahead of schedule in terms of its debt repayment, Jitesh Ranawat, Head, Institutional Sales, Marwadi Shares and Finance, said.
"We expect the company to merge Tata BSL with itself and also accelerate its capex programme in Kalinganagar, which will give a fillip to its capacities in India which had the highest EBITDA last quarter," said Ranawat, referring to the company’s facility in Odisha.
The key would be the movement of steel prices. Any major correction will be an opportunity to invest in Tata Steel as the stock has factored in lots of good news so far.
"Investors with a six-month view need to buy on dips as they can make more than 20 percent on it if the steel prices sustain at these levels for another six months. The stock currently trades at five times FY22E," Ranawat said.
Global financial firm JPMorgan has an “overweight” view on Tata Steel with a target price of Rs 1,810.
"The company reported its highest ever quarterly EBITDA and PAT despite volume being hit by the second wave of the pandemic. Tata Steel's debt declined further on a QoQ basis even after a substantial working capital build," JPMorgan pointed out.
Recently, global brokerage firm UBS maintained a “buy” call on the stock while raising the target price to Rs 1,800 from Rs 1,400.
The stock should definitely be a buy-on-dips candidate as it has broken out from a huge consolidation with an increase in volumes and a clear buy crossover in its momentum indicators.
"The short-term momentum indicators are overbought, hence there can be some consolidation which will be quite healthy for the stock going forward,” said Jay Thakkar, Vice President and Head of Equity Research at Marwadi Shares and Finance.
In the near term, resistance is pegged at Rs 1,535 and support at Rs 1,250. One can buy around the support levels for the long term as the metals are in an upward super cycle, Jay Thakkar said.
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