Tata Steel rallies post Q3 results, but brokerages cut target; buy, sell or hold?

Analysts at top brokerage firms remain watchful of Tata Steel as most of them have slashed their 12-month target price post December quarter results.

JP Morgan maintained its overweight call on Tata Steel post Q3 results but reduced its target to Rs 880 from Rs 980 earlier. The December quarter results were largely in-line with estimates.

There are twin tailwinds in terms of higher iron ore and European JV which is not yet priced in. The global investment bank raised EPS estimates by 4 percent for FY19 but warns of an upside risk to estimates if current iron ore price strength sustains. It slashed valuation multiple from 6.5x to 6x.

Another global brokerage firm, Credit Suisse maintained its outperform rating but slashed its target price to Rs 628 from 860 earlier.

Tata Steel reported weak India business performance in Q3. It slashed EBITDA estimates for both India & Europe going ahead. It slashed FY19/20e EPS to 24%/26%, and remain watchful on events around the JV with ThyssenKrupp.

Motilal Oswal maintained sell rating on Tata Steel with a target price of Rs 370. The company has highly profitable operations in India, but its capital allocation and the track record of turning around acquired assets have been poor.

Both Bhushan Steel and Usha Martin’s steel business acquisitions have been expensive, which will drag earnings for years, warns the domestic brokerage firm.

The recent loss of iron ore production at Vale post breach of a tailing dam has pushed up iron ore and scrap by 15-20%, which will eventually move steel prices higher on the slightest recovery in steel demand and can drive up the stock for some time, but it is unlikely to be sustainable.

“Price increase in India is challenging, given high inventory at the country level and rising production at SAIL and JSPL. Our sum-of-parts valuations suggest equity valuation of Rs 370/share. Maintain Sell,” it said.