November 2020 was the best month for metal companies in terms of stock performance on the back of a surge in steel prices in the domestic market. The Nifty Metal index jumped over 25 percent during the month, posting its best-ever monthly gain. In comparison, the benchmark Nifty50 rose 12 percent in the month.
The gain in the index was mainly led by steel stocks with Tata Steel and SAIL surging over 40 percent each during the month led by a rise in prices. Tata Steel also hit its 52-week high of Rs 590 per share in this period.
Among other stocks, Hindalco, JSPL, NALCO, Hind Copper, and JSW Steel also rose between 14 percent and 32 percent in November.
"Steel prices in India have rallied by Rs 4,000-5,000 per tonne (10-13 percent) MoM in November 2020. Despite these hikes, domestic HRC prices are trading at par to the landed cost of imports from Korea, raising the possibility of further hikes in December 2020," Motilal Oswal said in a recent report.
It added that domestic hikes are being supported by higher regional prices, which in turn are being driven by a sharp rise in Chinese domestic steel prices. Steel stocks like SAIL, Tata Steel and JSPL should benefit the most by rising prices.
However, contrary to rising steel prices, the raw material basket has been a mixed one. While iron ore prices are at a multi-year high, coking coal prices are at a four-year low, noted the report.
Meanwhile, Indian steel spreads are also at a three-year high and are expected to stay strong on the back of domestic demand recovery and higher regional steel prices.
The improvement in EBITDA per tonne should be even higher on an
improving sales mix, Motilal Oswal suggested. It also raised EBITDA estimates by 3-12 percent for FY21 to factor in higher spreads.
Among stocks, JSPL is MOSL's preferred pick in this sector followed by JSW Steel. Coupled with strong margins, they are also better placed to deliver higher volume growth in the medium term, it stated. JSPL also has the lowest leverage in peer growth with supportive valuations.
The brokerage has a 'buy' call on JSW Steel with a target of Rs 413 (15 percent upside).
"Coupled with robust margin, the firm offers a strong volume growth potential from its Dolvi expansion, which is slated to be commissioned in 4QFY21. Given the current strong spreads, concerns over the acquisition of Bhushan Power and Steel have significantly subsided," said the brokerage.
Meanwhile, it remains 'neutral' on Tata Steel as well as SAIL.
As per the brokerage, despite strong near term cash flows, leverage remains high making SAIL vulnerable to any down cycle in margins