Be selective while investing in metal stocks, say analysts

From an investment perspective, analysts caution against the steep valuation at which some of these stocks are trading at.

After witnessing a rally of 13.4 per cent in financial year 2017-18 (FY18), the Nifty Metal index has added another 5.2 per cent thus far in FY19. The up move in metal counters, analysts say, has been fueled by an upswing in base metal prices and crude oil, which they believe is likely to continue. From an investment perspective, they do caution against the steep valuation at which some of these stocks are trading at.

“I think base metals have risen quite sharply in line with some of the concerns pertaining to the United Company Rusal (UC Rusal) in Russia, which has led to huge run up in the aluminium prices. This reflected in the metal stocks and thus in the indices. That apart, firm oil prices have also impacted sentiment,” Saurabh Jain, AVP research at SMC Global Securities.

Rise in prices of crude oil increases the cost of production of the metals as oil is used for heating and extraction of metal from their ores, analysts say. Jain believes integrated players, i.e. those who process metals from their ores, are likely to benefit from firm prices.

The Donald Trump administration amended its Russia sanctions program, paving the way for aluminium major, UC Rusal, to escape from the blacklist and granting the metals market a reprieve from a supply scare that rocked markets over the past month.

Among individual stocks, SAIL, Tata Steel, MOIL, JSW Steel, Jindal Steel and Power gained between 14 – 81 per cent during FY18, ACE Equity data shows. By comparison, the Nifty Metal and the Nifty50 indices moved up 13.4 per cent and 10.2 per cent, respectively during this period.

Given the recent rally, analysts are now turning cautious on the sector and suggest investors remain selective.

A K Prabhakar, head of research at IDBI Capital, for instance, says though the sector may not be in a bull phase for a long term going ahead, there are still some stocks where investors can take a fresh investment call.

“Most of the stocks are trading much lower from their all-time high levels. On a year-to-date basis, the stocks have corrected around 20 per cent from their highs. Going forward, there will be selective performance. If interest rates start to go up then it will impact metal prices very badly,” Prabhakar said.

While Prabhakar prefers JSW Steel, Coal India and Tata Steel at lower levels; Jain of SMC Global advises investing in Vedanta (diversification following Cairn merger and also into base metals such as aluminium, copper and zinc) and Hindalco. He expects metal companies to do well over the next one – two quarters.

"Metal companies have been reporting strong earnings, buoyed by strong metal prices. While most of the leading private names are now running at near full capacities, they are vying to acquire stressed assets. Many with strong balance sheet have started announcing capex for augmenting capacities. The outlook for FY19 is robust on full benefit of high metal prices, driven by global demand fundamentals and modest volume growth," says Gautam Duggad, head of research at Motilal Oswal Securities.