Supercycle or not these 5 metal stocks delivered superb gains

It has even outshone the broader benchmark index, moving up 133% in the last year compared to a 53% rise in the Nifty 50.

While some may argue the rally is the result of a supercycle in metals, the fact is that most metal stocks have benefitted from this rally and delivered superb gains.

Here are the top 5…

#1 SAIL

Shares of SAIL have soared over 200% over the last 12 months on the back of rising steel prices. 

As the largest producer of steel in the country, the company was the beneficiary of soaring steel prices, robust demand by various sectors, and the government's focus on infrastructure. 

As a result, the company recorded its best-ever performance in both production and sales during the financial year 2021. 

It also deleveraged its balance sheet. In line with its focus on reducing borrowings, the SAIL reduced its net debt from ₹161.3 bn in 2020 to ₹153.5 bn in 2021.

For the June 2021 quarter, SAIL posted a net profit of ₹39 bn. It had posted a loss of ₹12.3 bn in the year-ago quarter.

Although the demand for steel products in the quarter has not had the same momentum as during the March 2021 quarter, focused interventions in several areas of operations have helped the company in achieving a robust performance.

The demand in the second half of the year is expected to remain healthy with sustained domestic consumption coming from sectors like infrastructure, manufacturing, packaging and automotive,

The company is also looking at bringing down its borrowings to ₹200 bn by the end of the financial year 2022. 

#2 Tata Steel

Tata Steel shares rallied over 250% over the last 12 months on the back of rising steel prices.

Like SAIL, Tata Steel too deleveraged its balance sheet. The company repaid ₹300 bn of its net debt in the last financial year.

In its latest quarterly results, the company reported its highest-ever operating profit of ₹162 bn, up 26 times from last year. Net profit also surged to ₹98 bn. The company had posted a loss of ₹46.5 bn in the June 2020 quarter.

During the quarter, Tata Steel made debt repayments of ₹59 bn. It has committed to deleverage further and bring down the debt significantly by the end of the current financial year.

The company has also expressed a commitment to invest ₹30 bn in Jharkhand in the next three years to augment capacities. 

#3 Hindustan Copper

Riding on the back of buoyant copper prices, Hindustan Copper (HCL) shares jumped over 200% over the last 12 months.

HCL is the only vertically integrated copper producer in India engaged in a wide spectrum of activities ranging from mining, beneficiation, smelting, and refining.

The company expects copper concentrate, not refined copper products, to be its primary product in the future.

It is also in the process of expanding its mining capacities from approximately 3.9 m tonnes per annum (MTPA) as of 31 March 2020 to 20.2 MTPA.

In its latest quarterly results, the company reported a 53.6% rise in net profit at ₹456 m. It had posted a net profit of ₹297 m in the year-ago period. 

It also said that it will consider raising funds worth ₹5 bn through the issuance of bonds and QIPs in its upcoming AGM on 22 September 2021. 

#4 JSW Steel 

JSW Steel shares have risen over 140% as rising steel prices boosted the company’s earnings. 

The company reported its highest-ever quarterly net profit of ₹59 bn against a consolidated net loss of ₹5.6 bn in the year-ago quarter.

The company spent ₹26.9 bn on capital expenditure during the quarter, which was nearly 15% of its planned capex for the current financial year.

It also plans to raise US$ 1 bn via an overseas bond sale to build capacity and lower fund costs. 

#5 Hindalco

Hindalco’s shares have risen more than 150% over the last 12 months on the back of rising aluminium prices.

The company reported an all-time high quarterly net profit of ₹27.9 bn. It had reported a loss of ₹7.1 bn in the same period last year.

The company’s strategy of reducing exposure to the global aluminium price fluctuations and increasing the share of value-added products across businesses is playing out well.

More than 80% of Hindalco’s consolidated operating profit this quarter was delinked from the volatility of the global metal prices.

In a bid to strengthen its market share, the company has earmarked a growth capex of US$ 2.5- 3 bn on over the next five years.

In the domestic market, the company is already on track to implement organic growth projects of over US$ 1 bn towards Utkal alumina expansion and various downstream projects in both aluminium and copper businesses.

As you can see, metal stocks have been on fire this year.

In fact, Brijesh Bhatia, Senior Research Analyst at Equitymaster, had called it the sector of the year at the start of 2021.

Watch this video for more.

Is the rally in metals a supercycle?

Soaring metal prices have sparked a debate on whether the world is entering a commodity cycle or a 'supercycle', an extended phase of abnormally high prices that lasts at least a decade.

Yes, there is a green industrial revolution on the horizon, which will multiply the demand for some commodities. However, that does not hold for all metals.

Lockdowns across the world had created supply bottlenecks and disrupted mining operations, which created scarcity and raised prices. This obviously has nothing to do with a supercycle.

Moreover, the weakening of the US dollar had an impact on commodity prices. When the dollar depreciates, producers in other countries need to increase prices so that their revenue in the local currency does not fall.

In the past 120 years, there have been only four supercycles and they were formed because of the spike in demand coming from industrialising countries.

Yes, there is demand for metals. But it is pent-up demand which is temporarily influencing metal prices.

Therefore, this is likely not a supercycle. It is a business cycle.

How this pans out for metal stocks remains to be seen. Meanwhile, stay tuned for more updates from this space.

This article is syndicated from Equitymaster.com