The Nifty Metal index has lost more than 17% in FY23, due to underperformance of both ferrous and non-ferrous metal producers.
Hindalco Industries, Vedanta, and National Aluminium Co were the major laggards in the
pack, as the stocks net lost 31-37% in the last financial year.
Among steel majors, JSW Steel, Steel Authority of India, and Tata Steel fell 9-22%.
For the quarter ended December, Tata Steel, the country’s largest steel producer, reported a consolidated net loss of Rs 2,223 crore primarily because of weak profitability both in India and Europe businesses. The steel maker’s operating margin shrunk to 7.3% from as high as 26% a year ago. Meanwhile, second major steel producer JSW Steel saw its net profit nosedive 88% on year.
The company also warned of global slowdown and geopolitical risks dragging its performance
in the coming quarters. JSW Steel expects a mild recession in mid-2023.
The correction in stock price has also weighed on the valuations. Tata Steel stock trades 7.6 times its 12-month trailing earnings, which is lower than the industry median, according to Trendlyne.
Similarly, Steel Authority of India stock trades at 9.9 times its 12-month trailing earnings, lower than industry average.
Among base metal producers, Hindalco Industries saw its net profit plunge 63% on year in the December quarter as growth in expenses outpaced revenue growth. The sharp deterioration was largely because of a poor show by arm Novelis Inc, which constitutes around 70% of Hindalco’s consolidated topline.
Similarly, diversified base metals producer Vedanta saw its net profit plummet 41% on year due to a 35% drop in the operating profit.
Following the correction in the stocks, both Vedanta and Hindalco Industries trade at over 7 times their 12-month trailing earnings, which is below industry average.
What’s in store in FY24?
Given that recession worries loom in developed economies the challenges to growth for steel producers likely remain in the first half of FY24. However, the re-opening of China’s economy post the COVID curbs may provide some tailwinds to the sector.
Brokerage Axis Securities is “equalweight” on the metals sector, as muted global demand and the decline in global metal prices continue to pose challenges in the near term.
But analysts do believe that the profitability of the sector has bottomed out, and some recovery on this front is likely to reflect in the March quarter earnings of companies.
“On a sequential basis, steel companies are likely to post superior performance in Q4FY23 (which is seasonally the best quarter for these companies). Furthermore, we expect profitability to recover in FY24 on account of the pickup in the volume of the steel companies,” Axis Securities said.
Some analysts believe that the sharp correction in share prices offer a good buying
opportunity to investors
Recently, Kotak Institutional Equities recommended buying Tata Steel stock as risk-reward turned attractive. The brokerage firm sees a 22% upside in this stock with a price target of Rs 130.
Sanjiv Bhasin of IIFL Securities too, has turned positive on the entire metal pack.
“Metals are going to rule the roost at least in the next three months. And I think the valuations are now very-very reasonable given the earnings opportunity and the China reopening, which
is going to be the real kicker for metals…,” he said.
(Data inputs from Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)