With prices of key metals coming off, metal stocks have been under pressure.
The Sterlite stock crashed nearly 12 per cent on Wednesday following a 7.5 per cent fall in the stock on Tuesday when the demerger of the aluminium and power businesses was announced. The stock was beaten down not only because the Street was disappointed with the terms of the demerger but also because of falling copper and aluminium prices, which have come off by 13 per cent and 10 per cent respectively since the beginning of June 2008. Besides, prices of zinc are currently ruling at $ 1782 per tonne, down 37 per cent from their peak in March 2008.
Falling aluminium prices could hurt Hindalco’s revenues, which were already weak in the June 2008 quarter, led by a drop in volumes for both aluminium and copper. While realisations were firm at the time, prices have since corrected.
A slowdown in the US and European market could result in prices of steel too coming off, say analysts who point out that the recent correction has been on account of fears of a slowdown in China and increased exports from that country. Domestic steel prices remain well below those of international prices, by about $150-$200 per tonne.
A correction in prices locally will not, however, impact steel producers immediately because a good portion of the contracts are long term in nature. Last year India was a net importer of steel.
After the correction in prices on Wednesday, steel stocks are trading at price to earnings (P/E) multiples of between 4 and 7 times estimated FY09 earnings. Given that demand is unlikely to taper off very sharply, the stocks appear to be reasonably valued.
However, the Sterlite stock may languish for some time since the Street was disappointed with transfer of Vedanta’s holding in Konkona Copper, to Sterlite in the ratio of 1:1. Analysts feel that the value ascribed to KCM at $3.5 billion on the higher side and also that it would dilute Sterlite’s equity. As for Hindalco, the huge dilution of 43 per cent caused by the rights issue and falling aluminium prices could make the stock a laggard.