Bullish on Tata Steel, Sesa Goa; sell Nalco: Angel Broking

Metal stocks have been under pressure over the last few sessions. In an interview to CNBC-TV18, Bhavesh Chauhan, Angel Broking says, he is bullish on Tata Steel and Sesa Goa. However, he has a sell on Nalco.

Sesa Goa, he says, has a target price of close to Rs 195.

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Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar.

Q: You have a buy on Tata Steel. But wouldn’t Tata Steel be disadvantaged in the sense that international iron ore, coal prices are anyway falling so that in house advantage, which Tata Steel had, is now getting wiped out. What makes Tata Steel interesting for you?

A: You are right it makes a disadvantage at India operations. But that is an advantage at its European operations. The valuations at current levels are certainly very attractive. Probably Rs 375 or even Rs 350 levels are very good entry points for investors.

If you see the plans of Tata Steel, the expansion plans are coming in profitable India operations which are backed by captive iron ore. So, there will be strong cash flows over the next two three years. For the time being, Tata Steel and even for that matter some other steel stocks are not doing well because of this CAG report. That is effecting each and every almost ever company, which has been allocated coal mines. But this is an opportunity for long term investors to get into these stocks we believe.

Q: Which are the stocks you most bearish on in the metal space? Most of them have already fallen quite a bit in the past few months. Which stocks would see more downside?

A: Nalco is our top sell. At valuation of 6.5 times FY14 EV/EBITDA, it looks expensive to us.

Q: What about Hindalco?

A: Hindalco is one stock we are not bullish, even at these price levels. Projects continue to get delayed and there is an overhang on upcoming Mahan smelter as well as Mahan coal block. So, aluminium business profitability has been going down. If you see over the last three-four years, some of the cost increases are quite sticky in nature. So, we do not like Hindalco even at these levels.

Q: Many of the commodity prices have fallen quite a bit. Iron ore prices are at lowest levels since November 2009. Do you see more downside in few of these commodities and hence what would your call be on the likes of Sesa Goa?

A: As far as iron ore goes, international price are close to USD 100 are lower than some of the marginal cost of production in the dominant Chinese market. So, we do not expect meaningful fall from these levels. If at all, over a next six-eight months, we would see a bounce in iron ore prices.

As far as Sesa Goa is concerned, now the valuation will probably mirror the combined entity of Sesa-Sterlite together where Sesa Goa’s iron ore operations will probably be 10-15% of the contribution to its valuations. At these levels, we are slightly bullish on Sesa Goa at these price levels. We have a target price of close to Rs 195.