At a time when the metal prices have begun cooling off, there are several beneficiaries that the market participants are betting on. With global prices of metals such as aluminium, copper and steel having moderated recently, some experts see auto ancillaries, engineering, capital goods and infrastructure among a few others as turnaround sectors.
Prices of copper and aluminium on the London Metal Exchange have fallen nearly 14 and 13 percent year-to-date, while domestic hot rolled steel was down 16 percent in China.
China domestic hot rolled steel is down 25 percent from its high of 5,331 that it had hit on April 6, 2022. On March 4, 2022, Copper and aluminium on the LME had hit a high of 10,702 and 3,877 and since then, prices of both these metals had fallen 21 and 37 percent, respectively.
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Anand Shah, Head PMS & AIF Investments, ICICI Prudential Asset Management Company, is of the view that intermediate consumers of metals are the ones that stand to benefit from the fall in metal prices.
He sees these intermediate metal consumers, which are an indirect play on manufacturing, as the turnaround sectors.
ICICI Securities has highlighted in its strategy report that the high-frequency indicators for November 22 suggested that domestic demand continues to be robust for corporates. The brokerage firm also pointed out that input cost pressures for manufacturers recede which will help improve prospects for earnings going ahead.
Shah named a few of the beneficiaries: auto ancillaries, engineering companies and capital goods companies.
With a fall in metal prices, raw material costs for these manufacturers and intermediate metal consumers would also come down. This will lead to an improvement in profitability, Shah explained.
“In the medium to long term, I see an opportunity which India has missed, which is manufacturing,” Shah said. He is confident about capital goods, logistics, infrastructure, utilities, and even banks. Banks will have a lot of recoveries from the manufacturing sector and will also have opportunities to lend into the manufacturing sector as they embark upon the capex cycle, Shah elaborated.
India Inc’s operating profitability has seen a sharp contraction in the second quarter of FY23 and first half of FY23, analysts said.
But, the recent commodity price correction will drive the margin pick-up sequentially in second half of FY23 and FY24, according to Motilal Oswal Financial Services.
“We project the following sectors to lead the EBITDA margin recovery in FY24: Cement (+310bp), O&G (+230bp), Metals (+190bp), and Auto (+180bp),” the brokerage firm said in its strategy note.
Criteria for picking stocks
Among several criterion, Shah believes there are three touchstones that he keeps in mind before investing: Growth, Moat and Sector Consolidation.
By growth, he means companies that have a strong growth potential, while moat implies companies that have a strong sustainable advantage over peers. This could mean any strong challenger and not necessarily a market leader, Shah explained.
Sector consolidation is another factor to pay attention to while investing. By this, he means selecting a sector that has a few players, and one which is not fragmenting.
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