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Indian metals stocks are having a prime time, with some of them climbing as much as 12 percent in the last month alone. In comparison, the Nifty Metal index jumped 10 percent, while the Nifty50 was down 0.7 percent over the past month.
This increase is explained by hopes of a recovery in demand in China, one of the largest producers and consumers of steel having announced a series of support measures for its economy. Even as sentiments turn in favor of ferrous metals players, analysts say the fundamentals aren’t quite there yet and the second quarter should serve as a reality check.
According to analysts, the recovery in steel stocks is mainly sentimental and largely based on hopes of an influential recovery plan from China.
“We expect metal prices to rise further in case the announcements made by Chinese authorities materialize. Sentiment may change quickly based on these developments,” said Parthiv Jhonsa, senior metals and mining sector analyst at Anand Rathi.
Last month, China’s central bank announced it would cut the reserve requirement ratio (RRR) by 50 basis points, freeing up about 1 trillion yuan ($142.21 billion) for new lending. Additionally, the seven-day repo rate will be lowered by 0.2 percentage points to 1.5 percent. It also pushed commercial banks to cut mortgage interest rates by 0.5 percentage points on average, improving the outlook for China’s real estate sector.
The support measures come as a relief for Indian metal exports, as the Chinese central bank’s economic efforts will allow it to use its metal production internally rather than selling it at lower prices on the global market , analysts said.
“In other positive news, Hot Rolled Coil (HRC) prices in Mumbai region have increased by around Rs 2,000 to Rs 2,500, signaling a positive change in market sentiment. The absence of discounts from dealers further underlines the strengthening demand,” Jhonsa said.
In our country, NMDC is up 12 percent each in the last four weeks, while JSW Steel, Vedanta, APL Apollo Tubes and Tata Steel are up 10-11 percent each.
Others, such as Jindal Steel & Power Ltd. (JSPL), Jindal Stainless Ltd., Steel Authority Of India Ltd. and Welspun Corp, also rose in the range of 3 to 7 percent each.
Moderate outlook for second quarter
Despite the optimism, the September quarter is expected to be softer, as according to a report from brokerage firm Nuvama, ferrous metals profit before interest taxes, depreciation and amortization could decline by 16 to 28 percent sequentially (except Jindal Stainless) with Tata. Steel saw the biggest decline due to higher losses in its UK operations and lower profits in its India operations.
On the other hand, overall steel prices are expected to be lower by Rs 2,400-3,500 per tonne on a quarter-on-quarter (QoQ) basis for the recently concluded quarter, partially offset by lower steel prices. coking coal, with Ebitda per tonne down by Rs 1,300. –2,400 per tonne QoQ.
“We expect sales volume to increase by 2% QoQ for all companies except JSPL, which may face a volume decline of 7% QoQ. On an Ebitda/t basis, JSPL will see the biggest decline amid lower volume and lower benefit from lower iron ore prices. Jindal Stainless’s Ebitda should be stable over a quarter. Tata Steel’s losses in Europe are expected to worsen quarter-on-quarter. SAIL is expected to post a net loss,” Nuvama’s Ashish Kejriwal and Jyoti Singh said in a recent note.
Investment strategy
Even after a decent recovery, analysts still believe metal stocks are worth investors’ money as non-integrated players stand to benefit from weak iron ore and coal prices. Investors, they suggest, should keep an investment horizon of 12 to 18 months in mind when investing in metals stocks, as much depends on whether China actually announces the measures. economic support.
“We favor non-integrated players like JSW and JSPL as they are well placed to benefit from falling input costs and rising material prices. Their operational efficiency and inventory management will play a crucial role in their performance,” Jhonsa said.
First publication: October 7, 2024 | 1:05 p.m. STI