Metal index clocks highest gain in over 4 years

Written by Jash Kriplani | Mumbai | Updated: Aug 23 2013, 09:15am hrs
The BSE Metal Index clocked its sharpest gain in more than four years at 8.23% on Thursday, as Chinas manufacturing purchasing manager index (PMI) hit a four-month high, hinting at a revival in one of the worlds largest metal markets.

The data pushed metal prices higher on global bourses and in turn stocks of domestic metal producers soared with Tata Steel gaining 10.22% and Hindalco rising 10.93% in trade. This was the highest gain seen on the Tata Steel and Hindalco counters in more than four years.

Other metal and mining stocks like JSW Steel and and Sesa Goa gained 9.77% and 13.10% respectively.

According to analysts tracking the sector, if demand in Europe and China stabilises, the metal stocks can see a stronger rally going forward. We are seeing a sharp rally in the prices of commodities over last two-three weeks, which indicates a possible turnaround. If the prices continue to rally it makes a case for a fundamental uptick for metal stocks from here on. The reversal in prices is also driven by underlying improvement in manufacturing data in China and Europe, said Saurabh Agrawal, metals analyst, Kotak Securities.

Chinas manufacturing PMI for August expanded to 50.1 from 47.7 clocked in last month, while Eurozones composite PMI rose to 51.7 from 50.4.

In August, while the broader benchmark index Sensex has declined 5.35% due to panic triggered by falling rupee and QE tapering, the BSE metal index has gained 15.14%. The selling pressure in August has pulled down all the sector-specific indices into negative territory, except for metal index.

Even in terms of market capitalisation (m-cap), all the metal majors listed in the 50-share Nifty have performed well in August. Hindalco Industries, Sesa Goa, Jindal Steel and Power and Tata Steel added between 6-18% to their m-cap, while 41 companies saw a decline.

However, in the year-to-date period, metal stocks continue to under-perform the benchmark indices. The metal index has tanked nearly 30% against Sensexs 5.73% fall.

While a number of the metal and mining stocks look cheap, experts feel that investors should not just look at valuations. SAIL, Hindalco Industries and Tata Steel are trading below their book value. But, given the volatile nature of the industry, book value is not a major criterion for us, Agrawal added.

On Wednesday, Nomura, upgraded metal stocks from underweight to overweight.

Over the past few weeks, global economic indicators, including data from China, have continued to strengthen. This has been reflected in the performance of global metal prices, which bottomed out in June and have been rising since the beginning of August, the brokerage said in a note. Indian metal stocks have continued to underperform YTD despite improved global economic data from major western economies, they added.

Market experts are of the view that a mix of positive news flow and healthy earnings is also benefiting certain metal stocks. Tata Steel reported healthy set of numbers in Q1. Shares of Jindal Steel & Power are rallying as the steel producer is likely to launch its buyback offer by end of this month, said Sonam Udasi, head (research), IDBI Capital.