Metal stocks top underperformers in 2013; outlook mixed

June 28, 2013

Shares of Indian metal companies are going through a rough patch in 2013 as a slowing economy at home coupled with rising input costs and weakness in Europe hurts demand.

Indian shares have had a mixed year so far, but the BSE metals index, which is a barometer of metal companies’ performance in India, has been the worst performer among sectors, data shows.

The 13-share metals index is down more than 33 percent this year, widely underperforming the benchmark BSE Sensex that has lost nearly 3 percent.

“Recovery is quite uncertain. China has slowed down. Once the demand slows down the pick-up in demand will take a lot of time,” said Sanjay Jain, senior vice-president at Motilal Oswal Securities.

Signs of slowing growth in China, which is the world’s top consumer of metals such as copper and steel, have dampened prospects, while weakness across Europe continues to weigh on the sector.

Metal stocks also suffered because of global overcapacity, rising input costs and delays in obtaining procedural clearances for mines, analysts say.

Ernst & Young said in a report that growth in global steel demand is unlikely to improve significantly in 2013 and sluggish demand combined with factors such as excess steelmaking capacity will challenge the sustainability of high-cost producers.

Despite the odds, there are some who believe the sector can recover.

“My view is in one quarter we will see some recovery. The speed of government spending will increase in the next six months time,” said Deepak Ladha, executive director at Ladderup Corporate Advisory.

TATA STEEL, OTHER STOCKS

Data shows that metal stocks are also among leading decliners in the 30-share BSE Sensex, with Jindal Steel, Tata Steel and Sterlite Industries at the top of the losers’ list in 2013.

Jindal Steel, which is down more than 50 percent this year, has suffered because of the alleged involvement in the ‘coalgate’ scam, while shares in companies such as Tata Steel have lost 38 percent.

Weakness in the European region has weighed on Tata Steel, India’s largest steelmaker by market value. The company had paid $13 billion to acquire Anglo-Dutch steelmaker Corus in 2007.

Two-thirds of Tata Steel’s 27 million tonne annual capacity is in Europe, and the company said in May that “severely depressed” conditions there are expected to continue over the short to medium term.

However, some analysts are optimistic about the stock’s future. According to Thomson Reuters data, 29 of the 48 analysts covering Tata Steel have a ‘buy’ or equivalent rating on the stock.

“Recent correction in stock price discounts the weak uncertain global environment and higher-than-estimated borrowing,” Avendus Securities said in a research note, as it maintained its ‘buy’ on Tata Steel with a target price of 325 rupees.

Other metal stocks that are among the major losers this year include Sterlite Industries, which has lost 32 percent in 2013 and is currently trading near its lowest levels since early 2009. The diversified metals and mining company had its own problems in recent months, when its Tuticorin copper smelter was shut for two months on environmental concerns.

Other top losers in the BSE metals index include SAIL and NALCO. The shares in these companies have lost around 40 percent during the period.

Despite the recent falls, 11 of 21 analysts covering NALCO have a ‘sell’ or equivalent rating on the stock, data shows. On SAIL, 17 of 40 analysts have a ‘sell’ or equivalent rating while 12 recommend holding the stock.

(You can follow Ankush on Twitter at @ankush_patrakar)

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