Check out Motilal Oswal's top picks from ferrous space

Motilal Oswal has come out with a report on ferrous large-cap stocks. Top picks are Tata Steel, JSW Steel and Sesa Goa.

Ferrous large-caps stocks:

Tata Steel: We believe that growth in high margin businesses both in India and overseas mineral investments will drive earnings growth. Cash flows from India business will continue to rise. Focus on cutting costs and improving productivity will aid long-term earnings sustainability. The stock trades at an attractive EV of 5.4x FY12E and 4.1x FY13E EBITDA. We reiterate Buy.

JSW Steel: We expect EPS CAGR of 51% over FY11-13. RoE is likely to improve from 7.9% in FY11 to 13.1% in FY12. The stock trades at attractive valuations of 8.3x FY12E EPS and 1.1x FY12E BV. On EV/EBITDA, the stock trades at 5.4x FY12E and 4.4x FY13E. We maintain Buy with a target price of Rs1,655 (EV/EBITDA of 6.5x FY13E).

Sesa Goa: The stock has been de-rated due to uncertainties relating to the Cairn deal, Karnataka export ban, and downgrading of volume guidance due to delay in getting statutory permissions. Despite all-time high iron ore prices, the stock performance has been subdued. We believe most of the negatives are already factored. The stock is now trading at attractive valuations of 7.6x FY12E EPS, and an EV of 3x FY12E EBITDA and US$8.3/ton. Our discounted cash flow valuation is Rs249-458/ share, assuming iron ore prices range from US$100/dmt to US$160/dmt on fob basis over the next 10-12 years. Though iron prices may soften from current levels, they will still remain very attractive and well above US$100/dmt. Risk to reward ratio has turned favorable. Maintain Buy.

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