Domestic stocks attract buying interest
DOMESTIC metal stocks like Hindalco, Tata Steel, Hindustan Zinc, JSW Steel and Vedanta continued to rally on the back of higher commodity prices. The metal stocks have been in the limelight over the past few months with BSE Metal index gaining by 25 per cent in the past three months while it rose 47 per cent in the past one year.
The metal stocks have been attracting buying interest as the global commodity prices were on a rebound with several metals hitting their multi-year highs.
Base metals prices made unprecedented gains over the past year while nonferrous metals had already touched record highs. Among the metal stocks Tata Steel rose 34 per cent in the past six months while it gave a return of 86 per cent in the past one year. Aluminium major Hindalco rose 32 per cent in the past 3 months and moved up 79 per cent over the last one year. Vedanta gained 100 per cent in the past one year to hit Rs 330, while JSW Steel rose 54 per cent during the same period.
Aluminium prices have recently moved up to five year highs of 16,330 Yuan/t on Shanghai Futures exchange. On the LME, momentum continued as copper and aluminium prices surged to the highest since December 2014 while Zinc and Nickel touched fresh five month high levels.
Brokerage firm Macquarie said it has revised price forecasts across commodities while it has upgraded aluminium by 4-9 per cent. “With higher-than-expected illegal aluminium capacity cuts in China, we are now forecasting a bigger deficit in 2017-18 and a surplus emerging only from 2020. We factor revised commodity prices, higher raw material costs and recent disclosure on hedges. We reiterate our Outperform ratings on Hindalco and Vedanta Ltd, Macquarie said in a report.
“We prefer base metals exposure over ferrous from both the near term and one year perspective given better fundamentals and stronger balance sheet making them relatively less vulnerable to the potential Chinese macro Slowdown,” it further said.
Motilal Oswal Securities said aluminum prices are trading stronger on supply side management in China. “We are raising the LME assumption by $175 to $2,000/t. We are also raising zinc LME assumption by 6 per cent to $3,400/t for FY19E as the short term outlook has turned more bullish,” it said.
It pointed out that Hindustan Zinc’s EBITDA increased by 8/12 per cent to Rs 162/171b for FY19E/FY20E and HZL’s target price
has increased to Rs 322/share (earlier Rs 301) based on 6.5xEV/EBITDA for FY19E.
Most analyst remain bullish on domestic steel stocks, as definitive antidumping duty for next 4 years will benefit large domestic steel mills, providing floor price to domestic steel players. Further, capacity utilisation of domestic steel industry is poised to hit 90 per cent in the next three years, as no new major capacity is coming up. Confluence of antidumping regime and supply shortage will firm up steel pricing over the next three years.
Tata Steel factory in Jamshedpur, Jharkhand