Indian metal stocks have eased Nifty by over 12-34% in the June quarter (Q1) as metal prices fell sharply amid rising risks of a global slowdown and imposition of steel export duties. Metal stocks are highly correlated with the consensus earnings trajectory, and global brokerage Jefferies believes the earnings cycle is turning downward.
“We have cut FY23-24 EPS by 2-34% for JSTL/Hindalco/Tata Steel and are down 10-31% from the Street. We believe it is still too early to be constructive as PB valuations remain above historical troughs, earnings visibility is poor, and consensus will continue to decline,” the note said.
The brokerage house has retained its hold rating on Indian metal stock Shares of Tata Steel and Hindalco with target prices 830 more 310 respectively, while JSW Steel underperforms with a price target of Rs. 405.
The combined impact of the real estate crisis and the Covid lockdown in China and tighter interest rate cycles elsewhere have clouded the global metal demand outlook.
The Chinese government can provide more support for the economy, although it may take time to materialize. A tight cycle in the US and elsewhere is likely to weaken demand outside China. A note said the risk of a Fed rate hike due to a global slowdown would be higher on commodity stock prices.
A sharp fall in metal prices is likely to lead to major margin reduction for Indian metal companies during FY22-24. Jefferies said it estimates Indian HRC steel at Rs 59K and coking coal at $320, both roughly in line with the spot.
“We became cautious on steel in January and downgraded HNDL in May (LINK) on rising global demand concerns. Indian metal stocks underperform in Nifty June quarter, but we believe still to be constructive as PB valuations cross historical trough, earnings visibility is poor and consensus decline should continue .
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.