02 Jun , 2022 By : Kanchan Joshi
The metal sector was the best performing sectoral index in 2021, however, the rally seems to be over for now as so far in 2022, the Nifty metal index is down by 5% in year-to-date (YTD) terms and 16% in a month. Metal stocks witnessed heavy sell-off last week after the government decided to impose export duties on steel-making raw materials like iron ore and pellets.
Q4FY22 marked a clear performance divergence between ferrous and non-ferrous companies. Going ahead, brokerage and research firm Edelweiss expects non-ferrous/mining companies to fare better as high coking coal cost and export duty would impact ferrous players.
The brokerage house has recommended metal stocks Hindalco (target price: Rs555), Vedanta (target price: Rs414) and Gujarat Mineral Development Corporation or GMDC (target price: Rs230), with all ‘Buys’, as top stock picks in the sector.
Higher raw material, logistics cost and supply chain distortion were strong influences in Q4FY22. “We expect Street to lower estimates for ferrous companies while raising them for non-ferrous. We still do not see Street reflecting the possible downside of export duty imposition on ferrous, hence, our estimates and target prices are much lower," the note stated.
In Q4FY22, there was stark distinction between the performances of ferrous and non-ferrous companies. While non-ferrous companies have surpassed consensus estimates, reporting QoQ improvement, the opposite was true for ferrous companies.
"Going ahead, we see elevated coking coal cost and a decline in domestic steel prices, pursuant to the imposition of export duties as the biggest earnings enervating factors. That said, we expect coal miners to continue benefitting from both volume uptick and record price," Edelweiss' note added.
Further, the brokerage expect ferrous/non-ferrous players’ performance to widen as coking coal cost likely to be up, export duty to likely impact Jun-22 steel realisation, prices, despite recent correction, to remain relatively healthy, and coal mining companiesto take the cake, aided by peak prices and robust volume.
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