The selling pressure seen on metal and mining stocks is expected to persist as the wider fallout of the imposition of export duty has not been fully priced in by the Street yet, Business Standard said in a report quoting analysts.
The BSE Metal Index has fallen 15 percent in the last 1 month against a flatting trade in the Sensex during the same period. Shares of Steel Authority of India (SAIL), JSW Steel, NMDC, and Jindal Steel & Power (JSPL) plunged over 20 percent each during this time.
As per the BS report, the sell-off in the metal stocks has been triggered by the central government’s decision to impose an export duty on steel in a bid to thaw domestic prices. Domestic steel and iron ore prices have also softened, following the levy, it added.
BS noted that the analysts expect the prices to come down further owing to weak demand, however, input cost inflation is likely to sustain. This, say, analysts, will have an adverse impact on the profit margins of companies operating in this space.
“Domestic steel/iron ore prices are down 8 percent/11 percent in the past two weeks. We believe this is mainly led by the imposition of export duty as opposed to companies guiding for a limited impact of the event. We expect further downward pressure on prices in the coming weeks, given weak demand and domestic price premium-to-export parity. Margins should see a hard landing in the second quarter (Q2) of 2022-23 (FY23) estimates (E), while consensus earnings are yet to reflect weakness,” wrote Sumangal Nevatia and Prayatn Mahajan, analysts at Kotak Institutional Equities told BS.
Market experts also pointed out that the benefit of a decline in input costs for steel companies accrues with a two-month lag. In the meantime, margins will also come under pressure, given the moderation in steel prices, they added. Further, the current environment is leading to a great deal of uncertainty weighing on investor sentiment, experts said.
The report also stated that Kotal expects margins to decline by ₹5,500-8,500 per tonne during the July-September quarter (Q2FY23), from January-March (fourth quarter of 2021-22) levels. There will also be some pressure during the April-June quarter (first quarter of FY23) while the recovery in margins will only take place during the second half of FY23, Kotak highlighted.
“We note that consensus earnings before interest, tax, depreciation, and amortisation estimates for FY23E are 20-33 percent higher than Kotak’s. The Street is underestimating the impact of the recent export tax amid weak domestic demand. Steel firms have deleveraged impressively in the past two years and valuations overall are not demanding. Nonetheless, amid declining prices and margins, stocks are likely to remain under pressure,” add Nevatia and Mahajan told BS.
The report informed that Kotak has a ‘sell’ rating on SAIL, JSW Steel, and NMDC, and a ‘reduce’ rating on Tata Steel and JSPL. If consensus earnings growth estimates of the metal and mining pack are scaled, it could also lead to a reduced Nifty earnings estimate for FY23, added Kotak.
Meanwhile, steel companies are hoping that the enforcement of export duty is a temporary measure, harking back to 2008 when duty was removed within a month of levying on certain steel products, said the BS report.