Metal Index falls over 20% in one month; What should investors do with Tata Steel, SAIL, JSW Steel, NMDC, JSPL, Nalco and APL Apollo?

Metal stocks remain under pressure due to supply side constraints and inflated input costs. Majority of the metal stocks, including Tata Steel, SAIL, JSWS, NMDC, JSPL and Nalco have declined significantly in the past three months. The correction sharpened with the government imposing export duty on select steel products. 

Metal Index, which remained the top losers on the NSE and BSE, have declined over 20% in the past one month as June 20.  

"Metal companies' earnings were impacted by higher input costs even when the metal prices were at decadal highs. The structural story was in favour of metal companies due to lack of investments in the sector in the last decade and supply cuts led by China's crackdown on pollution," said Manish Jeloka, Co-head of Products & Solutions, Sanctum Wealth.  

Even a moderate growth in demand was enough to shore up prices, said Jeloka.  

However, rising interest rates are a double whammy for these companies as they would hurt demand in major metal consuming sectors like infrastructure and housing, and increase the cost of their large borrowings, underlined the expert. 

"Low metal prices and high cost of debt may lead to some more pain in earnings and stock prices going forward," Jeloka added.  

Domestic Brokerage firm ICICI Securities largely remains bearish on these stocks Here is what it suggests one should do with Tata Steel, SAIL, JSWS, NMDC, JSPL and Hindalco.  

Reduce 

The brokerage firm ICICI Securities recommended a 'Reduce' on Tata Steel, SAIL, JSWS, NMDC, JSPL, Hindalco and Nalco 

It was of the view that asset valuations of these metal stocks are recalibrating given the external environment and a deleveraged balance sheet.  

"Another asset valuation benchmark bites the dust as the last downcycle equity valuation + deleveraging is breached for JSPL and SAIL. This is after the GoI’s export duty imposition led to 1x forward P/B benchmark being breached for the sector," it said.  

Hindalco and Nalco are feeling the possible pinch of aluminium returning into surplus from deficit over FY23/24E and possible compression in Novelis margins.  

Further, the increase in capex is not allowing any deleveraging, it said. "We maintain REDUCE on Hindalco, while downgrading NALCO to SELL from Reduce," the brokerage said.  

As far as NMDC is concerned, concerns over export duty of 58% Fe ore remains the biggest issue. Investor concerns are whether iron ore/pellets will ever see (export) duty normalisation again, said the brokerage. "We continue to maintain REDUCE on NMDC. NMDC has represented the ministry (steel) for GoI to reconsider the export duty on 58% iron/ore fines," it said. 

Preferred Pick: APL Apollo 

As per ICICI Securities, APL Apollo is one of the major beneficiaries of steel export duty. Sharp decline in steel prices is expected to dent EBITDA print in Q1FY23, as per the brokerage.  

"What will impact Q2/Q3FY23 for APL is the continuous downtrend of HRC prices leading to periodic destocking impulses. We maintain BUY on the stock with a revised target price of Rs1,042/share," it said.