Ambit Capital sees over 50% upside in this LIC’s favourite metal stock; should you buy?

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Brokerage Ambit Capital sees over 50% upside in Tata Steel, citing Chinese supply restrictions and ex-China capital starvation have finally set the stage for steel supply shortfalls. While retaining a ‘Buy’ call on Tata Steel, Ambit Capital believes that the metal major can touch Rs 2,200. Share of the company traded almost flat at Rs 1,376.40 at around 10.20 am (IST).

Tata Steel is one of the favourite stocks of the country’s biggest institutional investor Life Insurance Corporation of India. The insurance behemoth held a 6.67% stake in the company as of June 30. On the other hand, foreign portfolio investors and mutual funds had 21.94% and 11.13% stake in the company.

“Steel will likely undergo a similar tight supply cycle iron ore is going through since 2019,” Ambit Capital said adding Indian steel companies are in a sweet spot. However, it retained a ‘Sell’ rating on JSW Steel, Jindal Steel and Power and NMDC with a target price of Rs 760, Rs 425 and Rs 180, respectively.

“There’s a significant brownfield potential that should generate IRR of more than 25%. Returns should be less volatile, stay ahead of the cost of capital. That calls for re-rating,” it said.

The financial services firm raised FY23 EV/Ebitda for Tata Steel (7.4x) and JSW Steel (7.2x) and assume 13% cost of equity for Tata Steel. Earlier, it had set a target price of Rs 1,335 for the steel major.

India in a sweet spot

Ambit Capital believes that introduction of climate-friendly policies in India will be 5-10 years behind most countries. “Indian steel companies operate on the low end of the global cost curve, and stand to benefit from stronger domestic growth and higher exports to Southeast Asia,” it said.

It further added that there is a significant brownfield potential with major Indian players-these entails attractive payback with a return on capital employed (ROECE) of more than 25%. “Incremental ROIC should expand. We see similarities between current metals developments and trends in Indian specialty chemicals post 2014,” it added.