Metal stocks have been witnessing strong pressure of late. After hitting a fresh all-time high of 23742.99 on April 11, the BSE Metal index witnessed strong profit-booking and touched its 52-week low of 14922.08 on June 20. Year-to-date, the BSE Metal index is down 18 percent against a 10 percent fall in the benchmark Sensex.
Metal stocks saw a sharp correction amid concerns that a potential global recession and coronavirus outbreak in top consumer China could erode demand for metals.
Among the metal counters, steel companies have suffered more after the government imposed an export duty on steel.
ICICI Securities pointed out the government’s export duty imposition led to 1 time forward P/B benchmark being breached for the sector.
"With so much flux in liquidity and rate changes (sharpest single rate hike in 28 years by FOMC), asset valuations are also recalibrating. This compels us to fall back upon the directional movement of EBITDA/te to be our north star for the moment," said ICICI Securities.
The brokerage firm has maintained a 'reduce' call on Tata Steel, SAIL, JSW Steel, NMDC and JSPL.
"Hindalco is feeling the possible pinch of (i) aluminium returning into surplus (from deficit) over FY23/24E, along with the traded instrument facing the headwinds of a rising interest rate environment and (ii) possible compression in Novelis margins. APL Apollo remains our preferred pick in the sector and we maintain a 'buy' on it. We maintain a 'hold' on Jindal Stainless and Shyam Metalics," said ICICI Securities.
Deepak Jasani, Head of Retail Research, HDFC Securities pointed out investors are worried that interest rate hikes by major central banks could slow the global economy and reduce demand. Also, prices in China are falling as demand remains weak due to the resurgence of lockdowns in some regions.
As Antu Thomas, Senior Research Analyst at Geojit Financial Services puts in after a massive outperformance last year, the metal index is falling sharply due to the Government of India’s export duty imposition and flux in liquidity, and rate hikes by global central banks. The steel price (steel HRC) had corrected by 27 percent on a year-to-date (YTD) basis while the metal stock index melted sharply by 34 percent.
What is the road ahead?
The road ahead for the metal sector looks bumpy as the slowing economies and inflation are the two major headwinds.
"Metal prices have fallen quite sharply from the recent highs but if the fears of recession turn out to be true, they can fall even more from here. Hence investors should track the possibility of a recession and then take a call of bottom fishing," said Jasani.
"The government's imposition of hefty export duties on steel will lead to a decline in realizations for steel companies which have been resorting to exports in the last few years. Also, weak demand will further lead to falling in steel prices in the domestic markets. We do not see any recovery in these counters in the near term due to restrictions and curbs induced by the Covid-19 scare in China. Hence, we have a cautious view of the sector," said Thomas.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.
