In CY23, the Nifty Metal index recorded a decline of roughly 15%, making it the second worst performer, with Nifty Media leading the losers’ pack. The fall is in tandem with the broader market due to a banking crisis in the US and the ongoing tightening by central banks.
Why the underperformance?
Industrial metal prices have been trading at multi-month lows. Sharp declines in the underlying commodity and metal stocks were routine after April 2022. Rising raw material prices, stringent margins, China’s economic slowdown, and a levy of heavy export duty — all these headwinds stopped the metal stocks’ rally.
Though analysts and brokerage houses said that the sharp fall offered a buying opportunity, the negative sentiment has managed to overshadow the positive news, including demand revival in China.
Leading the losers’ chart, Adani Enterprises has dropped a whopping 50% since January, dragging the index lower after Hindenburg Research accused the firm of alleged stock manipulation. Though the srcip recovered most of the losses and lost just 14% in the past year, investors have turned cautious in the Adani Group companies since the report.
However, the stock has witnessed a staggering rally of over 1300% in the last five years. The flagship company’s quarterly results also helped give a boost to investor confidence. The company’s net profit also doubled for Q4 to Rs 780.68 crore for the March quarter of FY23 from Rs 325.76 crore the year earlier.
Other metal counters dragging the stock include NMDC (down 12%), Vedanta (down 11%), and Hindalco (down 8%), while JSW Steel, Hindustan Copper, and Tata Steel have also given negative returns for the year.
On the other hand, Jindal Stainless and Ratnamani Metals and Tubes are the only two stocks that have beaten the slump and offered double-digit returns to investors.
Can Q4 numbers be a game-changer?
Since earnings are ultimately the primary trigger for any industry or stock, the market will closely monitor the earnings of metal stocks in a challenging environment, explained Santosh Meena, Head of Research, Swastika Investmart.
Though Tata Steel was the first to disappoint D-Street from the metals sector after the steelmaker’s profit plunged 82% YoY to Rs 1,705 crore, while the revenue saw a 9% drop.
Talking about the poor Q4 performance, TV Narendran, CEO & MD, Tata Steel, said he expects steel consumption to return to positive levels in Europe from next year. The company’s Dutch business has been significantly challenged because of rising gas and electricity prices last year. The UK business still poses a long-term challenge, but the fundamentals of demand in India are still very strong due to construction activity and a revived auto industry.
Narendran also said that the three big factors that will drive sentiment are domestic demand in India, China’s recovery and resurgence, and coal prices.
“Due to export duties implemented between May and November 2022, steel exports decreased by over 50% in FY23. However, that channel has reopened over the past quarter, which should help volumes recover to some extent. In addition, higher prices and lower to flat coal prices will drive margin improvement. Given that demand fluctuated throughout the previous quarter, volume growth is expected to remain patchy. For some players, debt reduction may also be in the cards,” Meena explained.
Brokerage house Motilal Oswal expects the sector to report a sharp YoY decline in earnings, leading to an aggregate decline in the overall Q4 performance.
“While Auto and BFSI are the key growth drivers, with 107% and 56% YoY earnings growth, respectively, global commodities such as Metals and O&G will be the prime drag with 44% and 13% earnings decline YoY, respectively,” the brokerage house said.
However, brokerage firm PhillipCapital is optimistic about the sector, estimating a robust Q4FY23 quarter for almost all metal companies. ICICI Securities also sees margin improvement led by higher prices and lower/flat coal costs, while volume growth is likely to remain subdued as demand has picked up only post-Feb 2023.
In stock-specific terms, ICICI Securities believes that Jindal Stainless is likely to report EBITDA/te over Rs20,500 with sales volume and expects NALCO to report better performance largely due to higher LME Al and Alumina prices and lower thermal coal cost.
Kotak Securities, however, has a similar take on the sector as Motilal and expects the net income of metals and mining (on lower commodity prices, weak realization) is likely to decline sharply YoY.
While Hemang Jani, Equity Strategist & Senior Group VP, MOFSL, says that the metal sector is not in the best of the times in terms of earnings or sentiment, but typically when the economy is going to show good growth at some point, we will see interest coming back into the names, and Hindalco is our top bet, and apart from that, we like JSPL and NMDC.
Meena believes that despite the bleak outlook for the global economy, China is showing signs of recovery that could limit the downside, while the domestic economy is getting better. “Indian metal equities would also benefit from the underperformance of metal companies last year. A decline in the dollar may also aid in the sector’s recovery in FY24,” he said.
In an interview with ETNow, Chakri Lokapriya, CIO & MD, TCG AMC, said he’s in favour of the metal pack and expects the sector to do well due to low valuations and a production cut.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)