5 stocks from this sector doubled in 9 months. Worth a look?

With a stellar run in stocks so far this financial year, the metals pack has managed to outperform the benchmark equity indices till date. The superior performance of metal stocks in FY21 cab largely be attributed to rising domestic steel prices and muted coal cost, which led to earnings upgrades.

Market watchers say the momentum is likely to continue, and cite inexpensive valuation amid a demand-supply mismatch for this. The BSE Metal Index has rallied 82 per cent since the beginning of this financial year, with Jindal Steel & Power (JSPL) rallying the most at 208 per cent.

JSW Steel (up 144 per cent), Hindalco (up 140 per cent), Tata Steel (up 117 per cent) and SAIL (up 117 per cent) have been among the other major gainers from this sector.

Other metal stocks – including Nalco, Hindustan Zinc and Vedanta – have gained between 35 per cent and 90 per cent between April 1 and December 1. BSE Sensex has risen nearly 52 per cent during this period.

The sequential recovery in demand and lagging supply have raised steel prices across the world over the past two months, with prices rising 35 per cent in the US, 15 per cent in Europe, 13 per cent in Asia excluding China and 6 per cent in China.

In India, domestic steel producers tool Rs 3,000 per tonne price hike in November 2020, which raised total hike in average price in Q2FY21 by 20 per cent. Traders expect another Rs 2,000 per tonne price hike in December 2020, raising domestic hot-rolled coil (HRC) prices to a record high of Rs 48,000 per tonne.

Spreads on Indian steel have risen around 25 per cent in Q3FY21 and are hovering at a three-year high. Brokerage Motilal Oswal Financial Services believes the spreads should stay strong on the back of domestic demand recovery and higher regional prices.

In general, the commodity-product spread is the difference between the price of raw material and the price of a finished product created from that commodity.

“We expect margins to expand to record high levels in Q3FY21 led by strong prices, muted cost of coal and continued earnings upgrades,” Kotak said, adding that it has raised Ebitda estimates for steel companies by 8-12 per cent for FY2021E and 2-4 per cent for FY2022E.

All major components of the BSE Metal index posted profits for Q2FY21, which was an antithesis of the gloom and scare seen in the previous quarter. Barring JSPL, which posted a Rs 706 crore loss for September quarter, other metal majors reported profits ranging from Rs 100 crore to Rs 3,000 crore.

“Management commentaries in Q2FY21 were equivocally optimistic across companies. Going forward, we expect more earnings upgrades as Dalal Street takes cognizance of improved earnings outlook,” Edelweiss Securities said.

Kotak believes stocks in the ferrous space are trading below their historic mean on both EV/Ebitda and price-to-book basis and offer prospects for attractive upside despite the recent rally. The brokerage is positive on Tata Steel and JSPL.

Motilal Oswal prefers longs over flats in the steel sector, as it expects India rebar prices to be strong, led by a seasonal (post-monsoon) uptick in construction activity.

“Our analysis of pricing trends for last 10 years suggests longs have outperformed flats by around Rs 1,500 per tonne on an average in the second half of the financial year,” the brokerage said.

Motilal Oswal likes JSPL and JSW Steel with price targets of Rs 307 and Rs 413, respectively.

However, it has a neutral rating on Tata Steel and Steel Authority of India with price targets of Rs 604 and Rs 49, respectively.