In an interview to CNBC-TV18, Bhavesh Chauhan of Angel Broking said that he cautiously optimistic on the metal sector.
In an interview to CNBC-TV18, Bhavesh Chauhan of Angel Broking said that he cautiously optimistic on the metal sector. He likes only Tata Steel, National Mineral Development Corporation (NMDC) and Hindustan Zinc, otherwise he is more or less neutral on many of the stocks. He explained that the demand in domestic market for this sector looks quite weak and there will be pricing pressure.
Tata Steel had second straight quarter of good numbers and the other steel makers have also risen in tandem with Tata Steel. However, he advised investors to get out of JSW Steel and Steel Authority of India Ltd (SAIL).
Talking about the news surrounding Vedanta Group stock, he said that Hindustan Zinc will benefit the most in either of the scenarios whether it will be in offer-for-sale (OFS) or Vedanta is allowed to buy the shares. Chauhan is bullish on Hindustan Zinc with the target price of Rs 140.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Tata Steel had second straight quarter of good numbers and now everyone is talking about good data going forward. It remains under owned as well, do you think it is good for more from current levels as well?
A: This quarter results were very good, its operating profit was 20 percent above our and street estimates. So what is driving this stock is just sentiment where rupee has depreciated significantly. That gives a lot of pricing power to domestic steel players because landed cost of imported steel goes up significantly.
On the back of that the results were very good so we see that Tata Steel has been outperforming. From Rs 200 it has moved to Rs 270. Still we believe that there is some more upside left in the stocks based on conservative valuations. So, we do see 15 percent upside even from these levels.
Q: In general what is the call on the sector? Do you get the sense that the cycle has turned in favour of metals after underperforming for so many quarters now?
A: We are cautiously optimistic on the metal sector. We like only a few socks, Tata Steel, National Mineral Development Corporation (NMDC) and Hindustan Zinc. Otherwise we are more or less neutral on many of the stocks. The reason being that what we have seen is the demand in the domestic markets slowed down considerably.
If you see steel demand grew by only 3 percent in FY13, then in Q1 of FY14 it was only close to 1 percent. So demand in domestic market looks quite weak and there will be pricing pressure. What is helping them currently is rupee depreciation. Our economists’ fundamental view on rupee is that it may continue to depreciate or remain range bound but we do not expect any appreciation. So that is going to help them and that is why we see that last few days metal stocks have rallied quite a bit.
Q: What is your call on Vedanta Group stock? We have been carrying a story that the decks have been cleared for residual stake sell in Hindustan Zinc, the government’s stake sell, how would you approach some of these names, Hindustan Zinc itself, Sesa Goa and also Sterlite Industries?
A: After the run up, we only like Hindustan Zinc because fundamentally we see that it is the most undervalued stock. If the deal goes through, Hindustan Zinc will benefit the most in either of the scenarios whether it will be in offer-for-sale (OFS) or Vedanta is allowed to buy the shares. So, at current levels we are not bullish on Sterlite and Sesa Goa but we like Hindustan Zinc.
Q: What will be the target price on Hindustan Zinc?
A: Rs 140.
Q: You named Tata Steel as one of your top picks. What about the other steel makers, JSW Steel and Steel Authority of India Ltd (SAIL) because they as well have risen in tandem with Tata Steel. Should investors in these two companies use this bounce back to exit out, what is the call?
A: Probably we believe that from JSW and SAIL, it makes sense to get out. If you see SAIL, fundamentally they have not been able to sell the extra volumes that are coming in. They are almost doubling the capacity in the coming two years but we see that the marketing team is not as strong. So, their inability to lift sales volumes is going to hit in the current environment where domestic demand is very weak. We believe that SAIL should be the one counter where investors can exit.
On JSW we believe that the JSW-Ispat merger that has happened is likely to be a spoilsport. We do not expect a very significant jump in margins and even if they do, it is not sustainable. So we don’t like JSW Steel as well.