Shares of metal companies have shown an upward trend during the recent rally, having clocked substantial gains during the markets’ winning run. Even as the indices closed marginally down on Monday, metal stocks were the outliers, with the BSE Metal index gaining 2.37%.
In the last three months, Jindal Steel and Power has surged 31.4%, while Vedanta has jumped 18.13%. Among other majors, APL Apollo Tubes has gained 20.56%, JSW Steel by 13.5%, Hindalco by 9.6% and Tata Steel by 7%.
The trend has been quite favourable, and the sector could continue to impress in the near term, according to analysts.
“China is planning to relax Covid restrictions, and the worst in terms of margin pressure may be over for metal companies. Also, prices of key raw material coking coal have begun to soften. The consensus view is that while revenues may not touch 2021 levels anytime soon, the number may not go as low as during Q1,” said Vikram Kasat, head (advisory), Prabhudas Lilladher.
Interestingly, while Tata Steel recorded a quarterly profit after tax (PAT) of ₹2,655 crore, JSW and JSPL reported a quarterly loss of ₹91 crore and ₹473 crore, respectively, according to data from the exchanges. Vedanta had a PAT of ₹6,126 crore and Hindalco’s standalone net profit was at Rs 548 crore.
Significant price hikes could give a fillip to earnings for metal producers.
Jatin Damania, vice-president (fundamental research), Kotak Securities, said the removal of the export duty was a welcome move for steel producers, but there is unlikely to be any benefit in the near term. He added that export prices were now at a significant discount to domestic prices due to deterioration in the global steel markets in the last six months, because of which exports are unlikely to increase.
“Nonetheless, the removal of duty opens the export market ahead of capacity expansions in FY24-25E. Iron ore producers suffered significantly due to an increase in export duty. Now, the reduction in duty back to 30% increases the export parity floor by ₹1,000/tonne and should allow miners to take significant price hikes in the near term,” said Damania.
Strong revenues posted by these firms, coupled with the possibility of price hikes and scope for debt reduction, have kept the sentiment in favour of the sector.
Anmol Das, head (research) at Teji Mandi, a subsidiary of Motilal Oswal Financial Services, said the view for most metal companies has turned very positive over the last two years as record profits have allowed companies to get rid of most of their debt. An increase in real metal prices in physical markets could, therefore, lead to a substantial increase in their bottom lines.
He pointed out that usually during the winter, prices surge thanks to high demand and short supply. This is caused by high pollution in China, which attracts regulatory norms, thus curtailing production in inner steel and heavy metal industrial belts. Another reason is the increased use of fossil fuel for household heating in colder countries, which drives up the production cost for producers.
“This time around, the Chinese government’s U-turn on its zero-Covid tolerance policy may be the demand driver in Asia, while India and the US, with healthy economic data, are other geographies driving demand much higher than supplies,” said Das.
Citing the surge in metal prices across the globe since the start of November, Teji Mandi sees the trend continuing for the next few months, thereby driving prices of metal stocks higher.