Record Dec output gives analysts steely conviction in big metal stocks

NEW DELHI: Steel producers are in a sweet spot. They have been able to raise prices at will in the past couple of months, even as the demand situation improves, leading to record production for the domestic steel mills in December.

Companies like Jindal Steel and Power and SAIL have reported impressive recovery in production, with some plants clocking highest ever output.

The output data has enthused investors who binged on steel stocks this past week in anticipation of continued outperformance and relatively better numbers for the September quarter. Nifty Metal index is on a high.

“You are seeing a very strong recovery despite production constraints due to issues with iron ore supply. International demand has been very healthy as Chinese demand remains very strong and they are likely to be net importer this year,” said Abhimanyu Sofat, Head of Research, IIFL Securities.

Millers hiked steel prices at least four times in December on growing international demand and pickup in domestic industrial demand. Shares of steel producers have also run up in tandem with the price hikes.

Analysts, however, warn there are riders to this bull run.

“One critical thing to look forward to is how inflation moves, as it is important from a raw material point of view. Coal prices are up around 37 per cent QoQ and 19 per cent YoY. If you factor this in, integrated players would be better bets. So, stocks like SAIL or Tata Steel would do better than JSW,” said Abhimanyu Sofat, Head of Research, IIFL Securities.

Integrated players refer to those which are also involved in the business of mining coal and iron ore, two key materials in steel production.

Sofat says among the two biggest steel makers in India, the share price of SAIL can reach Rs 85 and that of Tata Steel can hit Rs 750. Iron ore suppliers like NMDC could do well as well.

On Thursday, Tata Steel traded at Rs 714, up 4 per cent; SAIL at Rs 78, up 2.5 per cent; and NMDC at Rs 127, up 3.7 per cent.

Since the market hit a low in March, as many as 34 stocks have more than doubled investor money. Tata Steel’s partly paidup shares are the biggest gainers, up nearly 600 per cent. Apart from that, Jindal Stainless Hisar, Jindal Stainless, JSW Ispat, APL Apollo Tubes, SAIL, and Usha Martin have been some of the biggest wealth creators of last nine months.

Dipan Mehta, Founder & Director, Elixir Equities, is bullish on the commodities space, as he believes it is already moving like a train with stock prices surging rapidly.

“Tata Steel does come to mind as it tries to get the UK operations under control in terms of Ebitda losses. This is a great time in the steel industry to get rid of non-performing assets, which Tata Steel is looking to do aggressively. That could be a special situation as far as the steel companies are concerned,” said Mehta.

Tata Steel is trying to sell its plants in Europe, those in the Netherlands and the UK, as they have been draining cash. But it has not succeeded in clinching a deal this far.

However, not everyone is looking at the steel companies through the same lens. Some value investors are avoiding the sector for the entire year.

Source link