BackIndian metals underperform Nifty in Q1. Here's what Jefferies recommends on metal stocks
Indian metal stocks have underperformed Nifty by 12-34% in June quarter as metal prices fell sharply
PremiumIndian metal stocks have underperformed Nifty by 12-34% in June quarter (Q1) as metal prices fell sharply amid rising risk of global slowdown and imposition of steel export duty. Metal stocks have high correlation to consensus earnings trajectory, and global brokerage Jefferies believes that the earnings cycle is inflecting down.
“We cut FY23-24 EPS for JSTL/Hindalco/Tata Steel by 2-34% and are 10-31% below Street. We believe it's still early to turn constructive as PB valuations remain above historical troughs, earnings visibility is poor, and consensus downgrades will continue," the note stated.
The brokerage house has retained its Hold rating on Indian metal stocks Tata Steel and Hindalco shares with target prices of ₹830 and ₹310 respectively, while has Underperform on JSW Steel with price target of ₹405.
Global metal demand outlook has been clouded by the combined effect of real estate woes and Covid lockdown in China, and the tightening interest rate cycle elsewhere.
The Chinese govt may provide more support for the economy, although this might take time to materialize. The tightening cycle in the US and elsewhere is likely to lead to weakening demand outside of China. The risk of Fed rate hikes leading to a global recession will likely be an overhang on commodity stock prices, it said in a note.
The sharp fall in metal prices is likely to drive a big margin contraction for Indian metal companies over FY22-24. Its estimates factor in Indian HRC steel price of Rs59K and coking coal price of $320, both broadly in-line with spot, Jefferies said.
“We turned cautious on steel in January and downgraded HNDL in May (Link) on rising global demand concerns. Indian metal stocks have underperformed Nifty June quarter, but we believe it's still early to turn constructive as PB valuations remain higher than historical troughs, earnings visibility is poor and consensus downgrades should continue," it added.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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