The Nifty Metal index, which marked a new 52-week high on January 18, 2023, at 6,919, has been reeling under pressure lately, correcting by about 1,059 points to 5,860, down 15.30% to date. It also stands as the worst-performing index among all NSE indices in 2023 so far.
At current levels, the index is down by 14.90% so far in the current calendar year, and more than half of the stocks are trading in the red.
The metal stocks were on fire between October last year and mid-January, driven by a number of factors, including easing Covid restrictions in China, the rollback of steel export duty providing an opportunity for domestic steel producers to export their products, and the decline in coking coal prices.
However, the heightened recession fears in the developed economies and China's sluggish industrial demand, coupled with weak earnings in the December quarter, have knocked down the metal stocks.
For the October-December quarter of FY23, major steel companies posted a sharp drop in their earnings, owing to higher energy costs and slowing demand.
Coking coal prices, which is a key raw material used in manufacturing steel, increased sharply during the quarter. As per media reports, the spot price of Australian coking coal hit a seven-month high of $345.67 in the second week of the current month.
For the December ending quarter, steel major Tata Steel reported a consolidated net loss of ₹2,502 crore on the back of higher expenses. The company had posted a net profit of ₹9,598 crore in the year-ago period.
Total income on a consolidated basis fell to ₹57,084 crore in Q3FY23 from ₹60,783 crore in a similar quarter of last year. The company's expenses rose to ₹53,036 crore during the quarter, an increase of 18.41% from ₹44,889 crore in the year-ago period.
The stock has dropped 4.5% since the Q3 results announcement on February 6. Following the company's Q3 earnings, brokerages announced mixed ratings on the stock. ICICI Direct Research maintained its "buy" rating on Tata Steel with a target price of ₹130 apiece.
In contrast, Geojit Financial Services retained its "reduce" rating on the stock with a SoTP target price of ₹98 apiece. The brokerage said it doesn’t see any major improvement in demand in the coming quarters as the European market remains depressed and margin decline continues owning to high input prices.
Along similar lines, Jindal Steel & Power reported a 72% YoY fall in net profit to ₹518 crore in Q3FY23 from ₹1,866 crore in the year-ago quarter. JSW Steel also logged an 89% drop in the net profit to ₹474 crore compared to a net profit of ₹4,516 crore.
Other metal companies, including NALCO, SAIL, Hindalco, Hindustan Copper, and Vedanta, posted a fall in net profit between 40% and 70% for the December quarter.
J.P. Morgan, however, stated in its latest research report that it is bullish on Indian steel companies on the back of improving domestic demand, the re-opening of export markets, and higher domestic steel prices.
According to the brokerage, domestic steel demand in India is still strong based on the consistently positive feedback from Indian steel companies during recent earnings calls.
In addition, domestic steel prices have moved higher by 10% in the last few weeks and remain at a discount to imported prices, so “we see scope for one or two further price hikes,” said the brokerage.
Finally, the brokerage noted that the export market has opened up for Indian steel companies with the removal of export duty.
Further, the low steel production from China augurs well for domestic steel prices, it says.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.