Nifty Metal was the best performing sectoral index for the month of August, rising over 8 percent as against a 3.5 percent rise in benchmark Nifty. It also surged 18 percent in August against a 9 percent rise in Nifty.
The recent rise in the metal index comes on the back of better-than-expected June quarter earnings and the decline in commodity prices after a huge surge since the Russia-Ukraine crisis began in February.
However, in the last 1 year, the metal index has risen 5 percent as compared to a 2 percent rise in Nifty.
In the metal index, all stocks except 1 - Tata Steel - gave positive returns in the last 1 month. 4 out of 14 stocks gave double-digit returns in the last 1 month, rising over 10 percent each. Adani Enterprises rose the most, up 27 percent followed by Welspun Corp, up 21 percent in the last 1 month on the back of strong Q1 results.
Meanwhile, Hindustan Copper, Coal India and NMDC advanced between 10-15 percent in this time. SAIL, which has lost 32 percent in the last 1 year also gained 5 percent in the last 1 month. However, Tata Steel gave negative returns, down half a percent in the past 1 month.
Metal stocks fell between April to June led by the rise in commodity prices due to weak global cues. Further, many metal stocks have also been hit by earnings downgrades after the center raised export taxes and duties on steel, iron ore, and petroleum products.
Analysts also believe that as far as metals are concerned, they are a function of the global economy's health but the recent cutdowns in global growth indicate that the demand for the metal will remain subdued.
So, despite a substantial decline in metal stocks, their valuations as are not very attractive, they add. Meanwhile, in the June quarter, while most metal firms did perform better than expectations, the profit of steel firms mainly continued to decline.
Domestic brokerage house Motilal Oswal decoded the main reason behind weak Q1 for steel firms.
June quarter began with strong pricing for steel players, with HRC prices increasing to ₹76,000/t in April 2022 from ₹72,000/t in March 2022. However, prices failed to sustain at these levels as demand remained tepid and prices continued to slide from the middle of April, noted the brokerage.
Further, an export duty of 15 percent was imposed, with effect from 22nd May’22, on several steel products, covering 95 percent of exports by value, it added.
At the same time, international steel prices weakened sharply due to continued weakness in the Chinese economy and rising exports from Russia, amid a slowdown in Vietnam. As a result, a correction was witnessed in domestic HRC prices and iron ore prices which contributed to the decline in profit, it noted.
It further stated that during the same period, the steel companies consumed coking coal procured at the highest prices (coking coal consumption cost is at a lag of almost 60 days from procurement prices) impacting the EBITDA margins significantly.
"With the imposition of export duty, consumption in India nearly halted for a few days as prices slid. Steel consumers postponed consumption in anticipation of a further price correction. This resulted in the pile-up of inventory at mills, forcing steel producers to cut prices further to move volumes, which, in turn, led to a further halt in steel purchases. Domestic consumption was also impacted as international prices remained weak. Domestic consumption fell 4 percent in 1QFY23, while crude steel production was flat QoQ, resulting in an additional inventory build-up of 0.5mt (which we believe will be revised upwards in subsequent quarters)," explained the brokerage.
In the June quarter, the brokerage noted that as EBITDA contracted, steel companies in its Coverage Universe reported a sharp decline in PAT. Tata Steel, JSW Steel, SAIL and JSPL reported a QoQ decline of 22 percent, 74 percent, 68 percent and 25 percent, respectively. Among non-ferrous stocks, it noted that Vedanta and Hindalco reported a PAT decline of 24 percent and 1 percent QoQ, while Hindustan Zinc reported a 6 percent QoQ growth. On the mining front, NMDC reported a 27 percent QoQ decline, while Coal India reported a 32 percent growth in PAT, it added. Its top picks in the sector remain Coal India, Hindalco and JSPL.
Axis also has a cautious view of the steel sector, as currently, the demand drivers are weak, and the China stimulus and actual bond issuance need to be monitored. It expects steel players' margins to take a further hit in Q2FY23 as the spot steel prices are down by 14 percent from the Q1FY23 average, partially offset by lower coking coal prices. However, it sees steel margins bottoming out in Q2FY23 on hopes of some recovery in Chinese demand with improving the Covid situation and the possible impact of stimulus measures. In the metal sector, the brokerage prefers APL Apollo Tubes and Coal India.