Metal stocks remain under pressure due to supply constraints and inflated inflow costs. Most stocks of metals, including Tata Steel, SAIL, JSWS, NMDC, JSPL and Nalco, have fallen significantly over the past three months. The adjustment deepened with the government imposing an export duty on selected steel products.
The metals index, which remained the biggest loser of NSE and BSE, fell more than 20% in the last month, like June 20.
“Metallurgical companies’ profits have been affected by higher raw material costs, even when metal prices have been high for decades. The structural history has benefited metal companies due to a lack of investment in the sector over the past decade and supply cuts driven by China’s crackdown on pollution, said Manish Geloka, co-head of products and solutions at Sanctum Wealth.
Even moderate demand growth was enough to support prices, Yeloka said.
However, rising interest rates are a double blow for these companies, as they would damage demand in large metal-intensive sectors such as infrastructure and housing and increase the cost of their large loans, the expert said.
“Low metal prices and high debt prices could lead to even more pain in profits and stock prices in the future,” Jeloka added.
The internal brokerage firm ICICI Securities remains largely a bear in these stocks. Here’s what one has to do with Tata Steel, SAIL, JSWS, NMDC, JSPL and Hindalco.
ICICI Securities recommends Tata Steel, SAIL, JSWS, NMDC, JSPL, Hindalco and Nalco
He was of the opinion that the valuations of the assets of these metal reserves were recalibrated in view of the external environment and the balance with reduced indebtedness.
“Another asset valuation benchmark is destroying the dust, as the last valuation of equity with a reduced cycle + debt reduction was violated for JSPL and SAIL. This is after the imposition of an export duty on GoI led to a breach of 1x forward P / B benchmark for the sector, “it said.
Hindalco and Nalco are feeling the possibility of a pinch of aluminum returning to excess from the deficit in 23 / 24E FY and possible compression of Novelis margins.
In addition, the increase in capital expenditures does not allow a reduction in indebtedness, it said. “We support Hindalco’s REDUCE, while lowering NALCO to SALES by Reduce,” the broker said.
As far as the NMDC is concerned, concerns about the export duty of 58% Fe ore remain the biggest problem. Investors are worried about whether iron ore / pellets will ever be normalized (export) duties, the broker said. “We continue to support NMDC REDUCTION. The NMDC is representing the Ministry (Steel) of the GOI to review the export duty on 58% of iron / ore fines, “it said.
Preferred choice: APL Apollo
According to ICICI Securities, APL Apollo is one of the main beneficiaries of the steel export duty. The sharp drop in steel prices is expected to disrupt the printing of EBITDA in Q1 FY23, according to the brokerage company.
“What will affect Q2 / Q3FY23 for APL is the continuous downward trend in HRC prices, leading to periodic impulses to remove stocks. We support BUYING shares with a revised target price of Rs1,042 / share, “it said.