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Home / Markets / Mark To Market /  Demand slowdown, lower prices weigh on metal company stocks

Stocks of metal companies undershot the Nifty 500 index last year. That may not change even with the recent corporate tax cut. The Nifty Metals index has been one of the worst performers so far in 2019, losing about 20%.

Last week, the government reduced the corporate tax rate from 30% to 22% on the condition that companies would avail no exemptions. The effective tax rate, along with surcharges, stands reduced to 25.17% from 34.94%.

In the metal sector, the implications of the cut vary among companies. Some avail additional state-level exemptions, depending on the states they operate in. Ergo, such companies may have to forgo these exemptions in order to qualify for the lower tax rate.

As such, companies with a more significant proportion of domestic earnings with lower exemptions stand to gain. Tata Steel Ltd, JSW Steel, NMDC Ltd and Nalco Ltd are expected to see an increase of 13-17% in their earnings per share. Others, such as Vedanta Ltd, Hindustan Zinc Ltd, and Jindal Steel and Power Ltd, will not see much change. Much of this will depend on how companies reassess their tax planning.

Considering that there won’t be a sizeable impact on earnings, metal stocks are expected to remain muted. “Lower tax is not a re-rating event as drivers lie elsewhere; the value lies only in selected stocks. Lower taxes will not drive significant change in the balance sheets of metals companies and concerns regarding high leverage persist," said analysts at Kotak Institutional Equities in a recent client note.

A bigger worry for companies is sluggish prices of metals and weakening demand, which endures.

Domestic steel prices have fallen 10% in the current quarter. Auto and construction sectors continue to see weak demand.

Internationally, copper and zinc prices have slipped about 7-8% each so far this year. Aluminium prices, though, are bucking the trend and have risen about 14% on the London Metal Exchange.

A slow-growing global economy is not helping. Despite ongoing talks between the US and China, the situation at the metals exchanges is one of caution. One positive is that central banks, globally, are loosening monetary policies, and this could contain downward pressure on metal prices.

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