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It’s been nerve-wracking for investors, specially in the metal space. From a high of 7,783 on July 15 when the S&P BSE Sensex was at 20,034, the S&P BSE Metal index lost 16.4 per cent till August 2, compared with a 4.3 per cent fall in the 30-share index.
The recovery, however, has been equally spectacular. While on one hand the BSE’s benchmark index is down 3.2 per cent since August 2, the S&P BSE Metal index has rallied 21.3 per cent.
Tata Steel, Hindalco Industries, Sesa Goa and Steel Authority of India Ltd were among the key gainers since the start of August.
“Metal stocks have been on an upward spiral since the start of August. The weak rupee is protecting our industry since the produce from these companies is fetching a better price in the markets. Imports have become costlier and are out of the way. The growth in Europe has sustained and the recent data from China has been encouraging. Thus, for metal companies, major markets such as North America, China and Europe have seen some stability return,” says A K Prabhakar, senior vice-president (retail research), Anand Rathi Financial Services.
China’s Flash HSBC Purchasing Managers’ Index (PMI) rose to 50.1 from July’s final reading of 47.7, the weakest in 11 months, though it barely passed the watershed 50 mark that differentiates expansion of manufacturing from contraction, reports suggest.
“We expect base metal prices to trade on a positive note due to strong manufacturing data from China, the euro zone and the US. More, a rise in the risk appetite of global markets, with the expectation of strong economic data from the UK, may support prices to trade in green,” says Vivek Gupta, director-research at CapitalVia Global Research.
There have been news-driven counters as well. Sesa Goa and Sterlite Industries rallied due to the impending merger. August 28 has been fixed as the record date for determining the shareholders to whom the shares of Sesa will be allotted.
Investment strategy
So, do changing fundamentals merit investing in this space or should one use the upside to exit?
“The landed cost of metal in India has gone up due to the rupee’s depreciation against the dollar. So, the domestic realisations are likely to improve. The economic indicators from the US and Europe, the major consumers of metals, have been encouraging,” says G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management.
“I don’t think the worst is over, since most supplies of Indian producers are limited to the domestic market, yet to see a pick-up in industrial and manufacturing activity. I won’t be surprised if the GDP (gross domestic product) in Q1 slips to 4.2 per cent. So, the pain in the domestic economy is still there. One should invest selectively. We like Hindustan Zinc, NMDC, MOIL,” he adds.
“Metal stocks have been beaten severely for two years. We are heading to a major bull market as regards the metal stocks. This is likely to be followed by capital goods counters. If the rally in the stocks of these spaces is sustained, I think the worst may be behind for the Indian equity markets. We like Hindustan Zinc, Hindalco and Tata Steel. They have the potential to rise by 25 per cent,” says Prabhakar.
Bhavesh Chauhan and Vinay Rachh of Angel Broking say the underperformance of metal stocks over the past one year is due to global overcapacity, subdued domestic demand, decreasing prices, rising input costs and delays in obtaining procedural clearances for mines.
“Nevertheless, we believe the recent fall has left some stocks undervalued. We like companies with captive assets, strong visibility on earnings growth over the coming few years, low leverage levels and inexpensive valuations. Our top picks are NMDC, Hindustan Zinc and Tata Steel,” they said in a recent report.
