Metals is the top gaining sector and steel makers are rallying on the back of positive read-through from China's promise of lowering steel production in FY22.
Rakesh Arora of Go India Advisors said the steel stocks have got stuck in the range because coking coal prices were rising pretty rapidly. “Coking coal prices went up from $120 to $400. That is almost a $250 dollar jump and that is a $150 per tonne margin compression for steel companies. That is the reason despite the decent value, steel stocks were getting stuck,” he told CNBC-TV18.
He added that on entering the busy season, steel prices have started to rise in India. There has already been between Rs 2,000 to 4,000 per tonne price increase, which he said, is contributing to the steel rally.
Arora pointed out that when looking at companies individually, there are firms that are a bit integrated for coking coal, so their impact is much less. “JSPL stands out because it has almost 60 percent integration, given its mine in Australia, Mozambique, and even South Africa.Tata Steel is next, which has around 40 percent integration. So these two would have an advantage over others. But valuation wise, they will be deleveraging and the amount of money they are making there is scope for all,” he explained.
Aluminium stocks too are on fire on the back of a surge in global base metal prices post Alcoa commentary and also the positive call from Credit Suisse.
Arora said, “Aluminium was trading at $2,400 when we said that we were bullish on it and we thought that the fair price for aluminium as compared to its substitutes steel or copper was around $3,000. So, that first target has been met.”
Talking about the all aluminium sector per se, he said there are two-three things that are driving it.
First is the disruption in bauxite availability given the regime change in Guinea, and it must be noted China imports almost 50 percent of its requirement for bauxite from Guinea, he explained. “There was a big cost push on making alumina. Alumina prices as a result shot up from $300 to $360-370 in a very short period of time. So, that is a big boost for something like Nalco which is hugely long alumina,” he said.
The second factor Arora highlighted is the supply disruptions because of which there have been energy shortages and aluminium production is getting cut. In India, where things are slightly better than the rest of the world, aluminium players are going to benefit because they might be able to maintain production given the energy scare, he said.
The third point he said is “finally, the state is starting to realize the pricing power is shifting from China to marginal producers and that is a very big, big development. I think this is what is really leading to a re-rating of the metal sector right now.”
On metal stocks and their earnings Arora said, “The way earnings are exploding like a year ago, they were doing $2 billion EBITDA. Now, we are talking about 5 billion plus and so, a $3 billion, incremental EBITDA is going to take away half of their debt in the current year itself. So a big part of re-rating is also driven by fuel deleveraging across our companies.”
According to him, the enterprise value (EV) of these firms hasn’t really changed much, which is what gave confidence that the stocks have further upside to go. On EV, they are still looking extremely cheap, even on sustainable margins, he said.
“I am not talking about current margins, on sustainable margins, they should get around six times, EV to EBITDA. While the market is focused on market cap, the EV hasn't really moved much for these companies because of deleveraging. So there is still scope on valuations for most of these companies and if this is sustained for another year or so I think there is a lot more upside,” he explained.
For the full interview, watch the accompanying video...
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
Exit polls predict NDA to win LS Polls 2024, INDIA bloc to cross three-digit figure
Jun 1, 2024 10:50 PM