Metals Pair Trade: Citi bets on a demerger-bound stock but wants to short its peer

Shares of Vedanta Ltd. are trading over 5% higher, while JSW Steel Ltd is up around 2% on Wednesday, February 25.

Global brokerage Citi has initiated a pair trade, assigning an 'Overweight' rating to Vedanta and an 'Underweight' rating to JSW Steel.

Citi said that JSW Steel appears to be trading at 9 times its EV/EBITDA, which suggests optimism beyond current spot steel prices.

The brokerage believes further upside may be limited, as steel prices are nearing import parity and capacity additions in the sector remain lumpy.

In contrast, Vedanta could see gains ahead of its proposed demerger. At 5.5 times its attributable EV/EBITDA and based on spot commodity prices of aluminium at $3,070, zinc at $3,325 and silver at $88, Citi sees potential upside of around 15%.

Separately, BofA Securities has upgraded Vedanta to 'Buy' from 'Neutral' and raised its price target by 75% to ₹840 from ₹480 earlier.

The upgrade is driven by BofA's bullish stance on aluminium, supportive silver prices and an attractive dividend yield of nearly 6%.

The brokerage also said that significant deleveraging at the parent level reduces the risk of any increase in the brand-fee rate on inter-corporate loans.

15 analysts track Vedanta, of which 11 have a 'Buy' rating and four recommend 'Hold'. None currently have a 'Sell' rating on the stock.

BofA's ₹840 target is the third-highest on the Street, after Citi's ₹900 and that of Systematix Group at ₹898.

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