Chink in metal scrips rally

Analysts feel fresh capacities may hit profitability of firms in future.

Metal stocks seemed to be on the rebound on Wednesday with all the fifteen constituents of the BSE metal index going up. Global metal prices too moved back into their previous levels.

The biggest gainer on Wednesday was Hindustan Zinc, which was also the biggest loser during the correction following the Monday morning blues at the London Metal Exchange this week.

With most global pundits predicting high volatility in all the global commodity markets including metals due to continued profit-booking, analysts are pointing to the need for investors to look more closely at metals bunch.

"The entire theory is based on the premise that it will take at least a year for new global capacity in refining and processing metal-ores to come about, but investors should also look at what happens after that," said Ajay N Shah, analyst with LKP Shares, Mumbai.

"But once capacity catches up with demand and prices come down, profits of these companies can again nosedive."

Shah favours companies actively converting the present windfall gains into long-term gains through capital expansion.

"Right now, even if the margins do not change at all, the profit and the EPS will be high due the increase in turnover. But only companies which are actively setting up new capacities or acquiring other companies will be able to sustain their earnings in the long-term," he said, quoting the example of Tata Steel, which after acquiring a company in Thailand and setting up a joint venture in Australia, is now looking at buying a South African firm.

He also warned of prolonged high prices, like the 100 per cent increase in Copper prices in the last five months, leading to consumers exploring replacements for the base metals.

"We are already seeingbeginning of it in the electric-wiring industry, with many now going for aluminium or aluminium alloys instead of copper wires," he said.

Hindustan Zinc, which was the top gainer on Wednesday with a 12 per cent jump, has also been the top performer over the past month, with a 37 per cent rise in its price in the second half of last month. On the other extreme has been JSW Steel which took a beating during the correction and has been underperforming its peers for some time.

"We do not see a correction in the metal prices as entirely negative," Seshagiri Rao MVS, Finance Director at the company, "since it is going to have a significant benign influence on our zinc raw material costs, used extensively in our galvanising operations."

Except for Sesa Goa, Hindustan Zinc and JSW Steel, most other metal stocks are now back at their month-ago prices, after slipping during the two-day correction.

Analysts expect their stock prices to be guided more or less entirely by global metal prices in the short to medium term.