Do­mes­tic stocks at­tract buy­ing in­ter­est

Financial Chronicle - - RISING METTAL STOCKS -

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

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