With the economic activity picking up pace and demand rising from infra, real estate and automobile sectors, the metal stocks are catching the attention of investors.
Year-to-date, Nifty50 has gained 8 percent while the Nifty Metal index has risen 17 percent. In addition to this outperformance, price on metal stocks may continue to rise as domestic demand recovers sequentially.
Demand for steel in January and February 2021 was up 6 percent and 7 percent year-on-year (YoY), respectively, pointed out brokerage firm Kotak Securities.
The outbreak of the COVID-19 pandemic hit the sector hard as companies struggled to run operations. But the industry made a fast comeback with the easing of lockdown restrictions.
"From the second quarter of FY21, the domestic steel sector has witnessed a strong revival, supported by several factors, including strong retail demand originating from a thriving rural economy and green shoots of recovery in white goods and the automobile sector, especially from tractors, passenger vehicles, and two-wheelers," Ashis Biswas, Head of Research at CapitalVia Global Research told Moneycontrol.
In the December quarter of FY21, some of the metal companies witnessed record high margins, which could extend to the March quarter as well.
"After record EBITDA in Q3FY21, we expect further Rs 4,000-6,000/tonne increase in Q4FY21. Stocks, despite the rally, are factoring a sharp correction in margins and earning upgrades should continue," Kotak said.
The recent rally in some steel stocks has raised the concerns of high valuations, but brokerages find them in line with their long-term historic mean.
"Valuations on current FY2022-23E earnings are in line with the long-term historic mean. With stronger balance sheets and high industry utilisation, we see a re-rating potential in steel stocks. We remain constructive and see further upside across steel stocks," Kotak Securities said.
Stocks to buy
Here are 8 metal & mining stocks, as suggested by various analysts/brokerage firms, that can give a healthy return in a one-year timeframe:
Brokerage firm: Prabhudas Lilladher
Jindal Steel | LTP: Rs 312.85 | Target price: Rs 460-480 | Upside: 53%
This stock has been rising for the past 5-6 months. It has regained strength with improved bias and has moved past the peak level of Rs 295, recorded in January 2018.
"We anticipate it can further retest the high made in January 2013 and can be added for investment for a time frame of 1 year with a target price of 460-480," said the brokerage firm.
Steel Authority of India (SAIL) | LTP: Rs 71.30 | Target price: Rs 110-120 | Upside: 68%
The stock has moved up recently taking support from the 200-day moving average level of Rs 55 on the weekly chart and has improved the bias.
"The stock has ample upside potential as compared to other metal stocks and can be a good investment pick for a time frame of 1 year with a target near Rs 110-120 levels," said the brokerage firm.
Tata Steel | LTP: Rs 706.75 | Target price: Rs 1,000 -1,050 | Upside: 49%
This stock has appreciated well from the levels of Rs 250 since April 2020 and currently has tested the previous major peak of Rs 750 level.
"We anticipate a breakout and further upside movement in the coming year to see target somewhere near Rs 1,000-1,050 with support seen around Rs 630 level," said the brokerage firm.
National Aluminum (Nalco) | LTP: Rs 57.85 | Target price: Rs 85-90 | Upside: 56%
This stock has gathered strength from the base made near Rs 28 and given a decent rally in the recent past.
"We anticipate a further continuation of the rally in the next coming 1 year also with a potential target of Rs 85-90 levels with support zone visible near Rs 50-52," said the brokerage firm.
NMDC | LTP: Rs 131.55 | Target price: Rs 200-220 | Upside: 67%
This stock has moved up decently from the strong support base near Rs 78-80 and currently has entered into a new zone.
Compared to other metal stocks, NMDC has underperformed and the brokerage firm expects further upward move due to well-placed indicators.
Analyst: Ashis Biswas, Head of Research at CapitalVia Global Research
Coal India | LTP: Rs 151.70 | Target price: Rs 210 | Upside: 38%
This stock gave a breakout of an inverse head and shoulder pattern on the daily chart. The analyst expects it to rebound from this level.
Jindal Steel | LTP: Rs 312.85 | Target price: Rs 400 | Upside: 28%
Jindal Steel is currently trading in an upward channel. Quarterly net profit at Rs 2,254.66 crore in December 2020 was up 905 percent from Rs 224.28 crore in December 2019.
National Aluminum (Nalco) | LTP: Rs 57.85 | Target price: Rs 87 | Upside: 50%
This stock has formed a triple bottom pattern on the weekly chart. Also, the company has planned to invest around Rs 30,000 crore by FY28 for its expansion and diversification.
"Considering the company's ambitious growth plans and its multiplier effect, we recommend going long on it," said the analyst.
Welspun Corp | LTP: Rs 133.40 | Target price: Rs 180 | Upside: 35%
"We saw the stock move through an upward channel. Technically a strong sign that we are likely to see higher prices in the months ahead," said the analyst.
Tata Steel | LTP: Rs 706.75 | Target price: Rs 850 | Upside: 20%
The total income from operations increased from Rs 35,520.41 crore to Rs 39,594.09 crore from Dec'19 to Dec'20. Also, the company's bottom line rebounded sharply from a loss of Rs 1,249.01 crore in Dec'19 to a profit of Rs 3,922.56 in Dec'20.
"Considering the company's strong financial performance, we recommend going long on Tata Steel," said the analyst.
Analyst: Siddharth Sedani, Vice President- Equity Advisory, Anand Rathi Shares and Stock Brokers
While Sedani did not give any target price for his picks, he specified following reasons for his faith in the counters.
For the latest quarter, the company reported a growth of 19.6 percent in sales at Rs 1,961.4 crore as against Rs 1,640.5 crore in Q3FY20.
The company’s operating profit margins stood at 27 percent at Rs 529.4 crore for the quarter against 7.2 percent at Rs 118.6 crore YoY, one of the highest operating margins.
The World Steel Association forecasts steel demand to increase 4.1 percent YoY to 1,795 mn tonne in 2021.
"Being the third-largest manufacturer globally and the largest in its home market (capacity: 98,000 tonnes), we expect Graphite India to benefit from a pick-up in steel production and higher realisations in electrodes," said the analyst.
"With nearly 28 percent of global steel produced in electric-arc furnaces, we expect the fortunes of GE manufacturers to turn around."
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