Selling pressure on metal and mining stocks likely to persist: Analysts

The selling pressure seen on metal and mining stocks is expected to persist as the wider fallout of the imposition of export duty has not been fully priced in by the Street yet, observe analysts.

The BSE Metal Index has been down 15 per cent in the past month, even as the Sensex traded flat during the same period.Shares of Steel Authority of India (SAIL), JSW Steel, NMDC, and Jindal Steel & Power (JSPL) have plunged over 20 per cent during the same period.

The sell-off has been triggered by the central government’s decision to impose export duty on steel in a bid to thaw domestic prices. Domestic steel and iron ore prices have softened, following the levy. Analysts expect the prices to come down further owing to weak demand. In contrast, input cost inflation will sustain. This, say analysts, will have an adverse impact on the profit margins of companies operating in this space.

“Domestic steel/iron ore prices are down 8 per cent/11 per cent in the past two weeks. We believe this is mainly led by the imposition of export duty as opposed to companies guiding for a limited impact of the event. We expect further downward pressure on prices in the coming weeks, given weak demand and domestic price premium-to-export parity. Margins should see a hard landing in the second quarter (Q2) of 2022-23 (FY23) estimates (E), while consensus earnings are yet to reflect weakness,” wrote Sumangal Nevatia and Prayatn Mahajan, analysts at Kotak Institutional Equities (KIE), in a note last week.

Analysts say the benefit of a decline in input costs for steel companies accrues with a two-month lag. In the meantime, margins will come under pressure, given the moderation in steel prices. They say the current environment is leading to a great deal of uncertainty weighing on investor sentiment.

KIE expects margins to decline by Rs 5,500-8,500 per tonne during the July-September quarter (Q2FY23), from January-March (fourth quarter of 2021-22) levels. There will also be some pressure during the April-June quarter (first quarter of FY23). Recovery in margins will only take place during the second half of FY23.

“We note that consensus earnings before interest, tax, depreciation, and amortisation estimates for FY23E are 20-33 per cent higher than KIE’s. The Street is underestimating the impact of the recent export tax amid weak domestic demand. Steel fir­ms have deleveraged impressively in the past two years and valuations overall are not demanding. Nonethele­ss, amid declining prices and margins, stocks are likely to remain under pressure,” add Nevatia and Mahajan.

KIE has a ‘sell’ rating on SAIL, JSW Steel, and NMDC, and a ‘reduce’ rating on Tata Steel and JSPL. If consensus earnings growth estimates of the metal and mining pack are scaled, they could also lead to a reduced Nifty earnings estimate for FY23.

Meanwhile, steel companies are hoping that the enforcement of export duty is a temporary measure, harking back to 2008 when duty was removed within a month of levying on certain steel products.