Metal stocks have been shining this year so far and they have seen healthy traction of late when the other sectors in the market were under pressure as geopolitical issues triggered a sharp selloff in the Indian equities.
Metal stocks have been gaining as the demand outlook improved with the economy picking pace in the wake of Covid-19. Besides, the recent Russia-Ukraine saga has boosted the sector as Russia is one of the largest exporters of various commodities and after economic sanctions imposed by the US, the UK and European Union on Russia, the supply crunch of commodities is expected to augur well for metals.
In the calendar year 2022 so far, the Nifty Metal index has jumped 11 percent while the benchmark Nifty50 is 4 percent down. Major gainers in the metal space are Hindalco, Vedanta, Jindal Steel and Power and Tata Steel, gaining between 18 to 26 percent year-to-date.
Jatin Damania, Vice President - Fundamental Research at Kotak Securities underscored that the last quarter performance of the sector was impacted by cost escalation, but going ahead, the performance deviation between ferrous and non-ferrous companies may increase on account of robust LME prices.
Besides, the crisis between Russia and Ukraine is also supporting the metal prices as Russia is one of the large exporters of various commodities, Damania said.
"Russia exports nearly 2MT of aluminum, which is close to 9-10 percent of the global aluminum trade, which is supporting the sharp uptick in the LME prices. Steel prices will also rise in the near term if Russian exports are squeezed. The recent rally in the metal index is largely driven by a sharp uptick in the commodity prices," said Damania.
Kshitij Purohit, Lead Currency & Commodities at CapitalVia Global Research has a similar view.
"Russia's ongoing military action in Ukraine threatens to impact nonferrous metals and energy prices, as Russia and Ukraine export nearly one-third of the world's wheat supply. In the case of domestic players, we see a positive impact because Russia has emerged as Southeast Asia's regional steel price setter," said Purohit.
What lies ahead?
Metal stocks may continue to see some traction at least in the short term as Russia is a significant producer of industrial metals like aluminium and nickel, economic sanctions against Russia are opportunities for Indian firms to gain market share.
"If Russian exports are reduced, combined with ongoing maintenance activities at Far East Mills and China focusing on reducing steel exports, Indian steel mills such as JSW Steel and Tata Steel are likely to gain market share in the export market," Purohit added.
The economic recovery and the government's push to infrastructure are also expected to give a boost to the sector.
Brokerage firm Edelweisshas a buy call on Hindalco with a target price of ₹650 and Vedanta with a target price of ₹430.
“If Russian exports are curtailed, coupled with the ongoing maintenance activities at Far East Mills and China focusing on reducing steel exports, we are likely to see Indian steel mills such as JSW Steel and Tata Steel gaining in the export market," Edelweiss said.