JSW Steel, JSPL, Tata Steel shares rise 12% in a month; more steam left?

The Indian metal stocks are having a prime time, with some of them rallying up to 12 per cent in just the last month. In comparison, the Nifty Metal index surged 10 per cent, while the Nifty50 was down 0.7 per cent in the last one month.

The up move comes on the back of demand revival hopes in China, as one of the biggest producers as well as consumer of steel, announced a slew of supporting measures for its economy. While the sentiments are turning in favour of the ferrous metal players, analysts said, the fundamentals aren't quite there yet with Q2 expected to serve as a reality check.

According to analysts, the rally in the steel stocks is mostly sentimental and has largely been on the hopes of an influential stimulus package from China.

"We anticipate a further increase in metal prices in case the announcements made by the Chinese authorities come through. Sentiment can shift quickly based on these developments," said Parthiv Jhonsa, the lead analyst for metal and mining sector at Anand Rathi.

Last month China's central bank had said that it will cut the reserve requirement ratio (RRR) by 50 basis points, freeing up about 1 trillion yuan ($142.21 billion) for new lending. Additionally, the seven-day reverse repo rate will be lowered by 0.2 percentage points to 1.5 per cent. It also guided commercial banks to reduce mortgage interest rates by an average of 0.5 percentage points, boosting prospects of China’s realty sector.

The supporting measures have come as relief for the Indian metal exports as the economical push by China's central bank will enable it to use its metal production in-house against dumping it in the global market at lower prices, analysts said.

“In another positive news, hot rolled coil (HRC) prices in the Mumbai region have increased by approximately Rs 2,000 to Rs 2,500, which signals a positive shift in market sentiment. The absence of discounts from dealers further underscores the strengthening demand,” Jhonsa said.

Back home, NMDC has rallied up to 12 per cent each in the last four weeks, while JSW Steel, Vedanta, APL Apollo Tubes and Tata Steel have each soared by 10-11 per cent.

Others such as Jindal Steel & Power Ltd. (JSPL), Jindal Stainless Ltd., Steel Authority Of India Ltd. and Welspun Corp have also moved up in the range of 3-7 per cent each.

Mild prospects in Q2

Despite the optimism, the September quarter is expected to be milder, as according to a report by brokerage firm Nuvama, ferrous metals earning before interest tax, depreciation and amortisation may decrease by 16–28 per cent sequentially, (except Jindal Stainless) with Tata Steel suffering the steepest decline owing to increased losses at its UK operations coupled with lower profits at Indian operations.

On the other hand, overall steel prices are expected to be lower by Rs 2,400–3,500 per tonne quarter-and-quarter (Q-o-Q) for the recently concluded quarter, partially offset by lower coking coal prices, with Ebitda per tonne dipping by  Rs 1,300–2,400 per tonne Q-o-Q.

“We expect sales volume to increase by 2 per cent Q-o-Q for all companies, except JSPL, which can face a 7 per cent Q-o-Q decline in volume. On an Ebitda/t basis, JSPL will see the highest decline amid lower volume and lower benefit of fall in iron ore prices. Jindal Stainless Ebitda is expected to be flat Q-o-Q. Tata Steel’s Europe losses are likely to deepen Q-o-Q. SAIL is expected to slip into a net loss,” said Ashish Kejriwal and Jyoti Singh of Nuvama in a recent note.

Investment strategy

Even after a decent rally, analysts still believe that metal stocks are worth investor's money as non-integrated players are expected to benefit from the low iron ore and coal prices. Investors, they suggest, should keep an investment horizon of 12-18 months in mind when investing in metal stocks, as a lot is dependent on China’s actual announcement of the economic support measures.

“We favour non-integrated players like JSW and JSPL because they are well-positioned to benefit from lower input costs and rising material prices. Their operational efficiencies and inventory management will play a crucial role in their performance,” said Jhonsa.