Amber signs continue to flash for metal companies. Rising inventory levels in China and subdued metal prices are driving metal stocks south, which could drag the downturn for a long time.
In the last month, the Nifty Metal index lost 14.3%, which was among the highest in the sectoral indices. In the past year, against a fall of about 9% in the Nifty 500 index, the Nifty Metal index lost a whopping 32%. Stocks of Steel Authority of India Ltd (SAIL) Ltd, Jindal Stainless (Hisar) Ltd, Jindal Steel and Power Ltd (JSPL), Hindustan Copper Ltd, Tata Steel Ltd and Vedanta Ltd figure among the top losers in the metal index. SAIL has lost as much as 55% this past year, JSPL 49%, Tata Steel 40% and Vedanta 36%.
Low global prices have hit domestic revenues. To top it, the slowdown in domestic demand further played truant, taking a toll on net profits. “Metal companies under our coverage exhibited muted performance in 1QFY20 with EBITDA/PAT declining 18% & 43% YoY. The subdued results were driven by lower prices amid global uncertainty, weak demand in India and lower to broadly steady volumes," said analysts at Motilal Oswal Financial Services Ltd in a client note. Ebitda stands for earnings before interest, tax, depreciation and amortization, and PAT is profit after tax.
For now, the recovery could take longer than anticipated. The auto sector continues to grapple with the slowdown, rising inventory and lower sales. Government spends on infrastructure have yet to show signs of improvement. Barring JSPL, other large companies have either reported lower or flat steel volume growth. In fact, steel makers are expecting prices to slip further by about ₹3,000 per tonne.
Recovery could take as long as the second half to materialize. Production cuts, for now, are resulting in increasing working capital and costs. Additionally, a Chinese inventory build-up means prices will remain flat or lower for some time. Many metal firms have also expanded their capacities. That would translate into cost increases against a backdrop of lower volumes.
A few firms face the prospect of weakening debt servicing capabilities if the metal prices don’t improve. “Despite management guiding for debt to stay below ₹44,000 crore, as at Q1FY20 end it stands at ₹48,500 crore—the highest-ever level for SAIL," said analysts at Edelweiss Securities Ltd in a note on 14 August.
A good thing is that iron ore prices eased this past month by about 26% to about $89 per tonne, which can reduce costs for steel makers. However, the management commentary on the demand outlook continues to show weakness for most metal firms. Both prices and volume offtake are important for a full-fledged recovery. From the looks of it, both are some time away— which means the Nifty Metal index may remain subdued for some time.