Metals stocks may continue to shine | Economic Times

Mumbai: The recent correction in metal stocks offers a good buying opportunity as the sector continues to shine in the near term with higher consumption forecast, balance sheet repair, and new demand from electric vehicle and renewables segments, according to analysts.The prices of metal stocks have fallen by an average of 5% in the past week.Significant structural changes in the sector, such as decarbonisation in China and the new shape of global trade, will ensure that commodity prices in the trough are likely to settle higher. The ongoing balance sheet repair by domestic companies provides the improved earnings profile and margin, according to analysts.While Vedanta, Jindal SAW, Steel Authority of India (SAIL) and Nalco fell between 5% and 8% in the past week, many other metal stocks corrected up to 5%. However, Tata Steel gained more than 5% during this period.“The ongoing balance sheet repair has been comprehensively ignored by the Street so far,” Amit Dixit of Edelweiss Securities said. “For the first time, we are witnessing a scenario where despite capex picking up FY22 onwards, ferrous companies will be in much better shape by FY25 due to enhanced capacities but lower net debt.”High margins for the last several quarters helped the companies deleverage their balance sheet.Metal stocks have had a sharp rally since the beginning of the year. The Nifty Metal index surged 68% compared with a 17% gain the Nifty index. Tata Steel rallied 113% so far in 2021, while JSW Steel, Vedanta, SAIL, Hindalco, National Aluminium and Hindustan Copper rose between 75% and 100%.The metals & mining sector is prone to low valuations due to inherent cyclicality in earnings. However, going forward, because of the structural shift in price trajectory, analysts expect re-ratings of the stocks with a change in methodology.On EV/Ebitda two-year forward multiples, JSW Steel is trading above its historical average, Tata Steel is trading in line, and Jindal Steel and Power and SAIL are below the average.The current trend in the sector is likely to continue with restrictions in China and improved global demand, said analysts.85440094“We expect the efforts from China to impose restrictions on domestic production will provide impetus to sustain the current cycle," said Vinod Nair, head of research at Geojit Financial Services. The current uptrend in the metal sector is due to pent-up demand post-reopening of the economy, he said.While steel demand in India has declined during the second Covid wave, the impact has been less than last year during the first wave. Analysts expect the market to recover post-festive season and grow 10% in FY22 and 8% in FY23, supported by a significant push in infrastructure investments, offtake from the engineering and packaging segments, recovery in auto volumes, and to some extent, revival in the building and construction segment.“From the perspective of shareholders, this wave of expansion does provide scope for a free cash return, and an increase in pay-out considering net debt is likely to drop significantly below targeted levels,” BOB Capital analyst Kirtan Mehta said.