The brokerage firm JM Financial has identified some key picks in the metals space. According to the brokerage report, Jindal Stainless, Hindalco and Tata Steel are its top picks even as the September quarter looks weak for Indian steelmakers.
The brokerage house believes these companies have the right mix of balance sheet strength, margin visibility and growth potential to ride out the near term volatility.
JM Financial’s top picks – Jindal Stainless, Hindalco and Tata Steel
The brokerage firm has highlighted three names as its favourites. As per the brokerage report, “Jindal Stainless (lowest leverage, highest volume growth over the next few years), Hindalco (non-ferrous) and Tata Steel remain our top picks in the metals space.”
Let’s take a look at the brokerage’s top picks in the metals and mining sector –
JM Financial on metals: Why the current quarter looks weak
The brokerage in its report noted that average domestic HRC prices slipped to Rs 49,600 per tonne in the September quarter, “down around Rs 2k/tn compared to Q1.” Similarly, longs declined more sharply to Rs 48,600 per tonne, a fall of Rs 7,000 sequentially.
“Indian ferrous players are likely to witness an EBITDA/tn contraction to the tune of around Rs 3.5k/tn in 2Q given lower realisations partially offset by lower coking coal costs,” JM Financial noted.
The weakness comes on the back of Chinese exports flooding the global market. China shipped out 77.5 million tonnes year-to-date, up 10% compared to last year.
Still, there are signs of relief for Indian companies with NMDC adjusting ore prices – first cutting rates by Rs 500 per tonne in July before hiking them again by Rs 400 per tonne in August. On the cost side too, steelmakers expect “USD 5-10/tn reduction in P&L coking coal consumption cost” during the quarter.
JM Financial on metals: The China factor
Much of the global steel mood is being set by China. According to the brokerage, “China domestic HRC prices witnessed an uptrend in Q2 with spot prices at USD 468/tn, higher by USD 20/tn compared to Q1.” Rebar prices, however, corrected to USD 457/tn after spiking briefly in August.
China’s exports continue to weigh heavily on global pricing. “China’s steel exports for CY24 surged to 111mn tonnes (up ~22% YoY),” JM Financial noted in its report. However, Beijing’s recent decision to curb domestic production could lend some support to international prices if implemented effectively.
JM Financial on metals: Non-ferrous gains momentum
Unlike ferrous players, non-ferrous companies are expected to post better margins. JM Financial noted that “average LME Aluminium came in at USD 2.6k/tn, up ~USD 140/tn vs. Q1,” which bodes well for Hindalco and Hindustan Zinc. Zinc too saw a recovery, with global prices up USD 120 per tonne quarter-on-quarter.
This margin expansion offers a cushion at a time when steelmakers are grappling with lower spreads. The brokerage believes this mix of ferrous weakness and non-ferrous strength makes select diversified players more attractive.
JM Financial on metals: The outlook for the second-half
While the September quarter looks soft, JM Financial is optimistic about the rest of the year.
“We anticipate a jump in H2 spreads driven by a) USD 20/tn rebound in China domestic HRC prices in Q2 compared to Q1, b) Indian government plugging loopholes in safeguard duty, c) increased visibility on import duty from 200 days to 3 years, and d) H2 being a seasonally strong period consumption-wise.”
The brokerage also noted that falling raw material prices could ease working capital needs, helping companies bring down net debt.