After rewarding investors with solid returns in 2020 and 2021, metal stocks have underperformed in the Nifty 50 index this year. So far this year, the Nifty Metal index has corrected by 18 per cent after a 16 per cent surge in 2020 and a whopping 70 per cent rise in 2021, as per data from stock exchanges.
The Nifty Metal index is amongst the top five sectoral losers this year. However, the stocks in this 15-member index have corrected by almost 51 per cent, with twelve shares posting negative returns.
Jindal Stainless is the top loser in the Nifty Metal index, with its stock plunging by 51 per cent. SAIL, Vedanta, Hindalco, NALCO, Hindustan Copper and Tata Steel have also corrected between 20 per cent and 36 per cent.
What Is Fueling The Sharp Selloff In Metal?
Metal stocks have been under intense selling pressure since last month after the government imposed a 15 per cent export duty on several finished steel products. Rating agency CRISIL has estimated that India's steel exports could reduce by 40 per cent to 12 million tonnes (MT) in the current financial year due to the duty-related measures taken by the government last month.
The finished steel export reached a record high of 18.3 million tonnes in FY 2021-22, with prices at their all-time high back then. However, on May 21, the government announced waiving off customs duty on the import of some raw materials, including coking coal and ferronickel, used by the steel industry. Also, the duty on iron ore exports was hiked by around 50 per cent and for a few steel intermediaries to 15 per cent.
"India's steel exports will drop by 35 per cent to 40 per cent to 10-12 million tonnes this fiscal following the 15 per cent export duty imposed on several finished steel products last month. Exports of iron ore and pellets will also fall this fiscal and lower domestic prices," the CRISIL research analysis said.
A slowdown in China following lockdowns during the pandemic and subdued real estate demand has also led to an excess supply of various industrial metals, which has affected the price of metal stocks.
Metals shares have been very volatile, and their high/low prices come back every 4 to 5 years as they are cyclic. During the peak, their price-to-earnings ratio (P/E) ratios are often very low and command cheap valuations, explained AK Prabhakar, head of research at IDBI Capital.
"Metal companies have seen the raw material cost for products like coke and coal go up. In addition to the subdued international and domestic demand, the 15 per cent export tax has been one of the main reasons for mega fall in metal shares," Prabhakar stated.
"China has surplus metal inventories. With lockdown and real estate not doing well there, excess supply is entering the market, which never happened in the last two years," Prabhakar added.
What Should Investors Do With Metal Shares
After the sharp selloff in metal shares, many have come to attractive levels. For example, SAIL's stock corrected to Rs 65, which can go down to around Rs 45 levels where it would form a base and investors with a long-term view can look at buying shares, Prabhakar said.
"Many companies in the sector like Tata Steel, SAIL, Hindalco and others are reducing their debt, and their debt levels have come down drastically, but rather being an aggressive buyer in metal shares, one should buy these shares at a slow pace. Investors should buy them for long-term perspective ideally through the systematic investment plan (SIP) route," he further noted.