Metal stocks: Another 10-15% dip not ruled out

As uncertainty continues, experts expect high volatility in these counters

The Supreme Court's (SC) decision on coal block allocations since July 1993 hit investor optimism that the new government will be able to facilitate faster clearances. While the S&P Sensex gave up most of the 210 points intra-day gains it saw on Monday before the SC's decision came, the Metals & Mining index tanked 558 points, or 4.34 per cent, contributing the most to Sensex's decline.

While the SC has stopped short of de-allocating the mines and terming the allocation illegal and arbitrary, there will be more hearings. Till then, there will also be no clarity whether these blocks will be de-allocated, or fines imposed. Analysts such as Abhisar Jain at Centrum Broking believe further actions and developments will have to be tracked closely but if the end result is de-allocation, it will be a big negative for companies.

Among non-ferrous players, Hindalco could be hit the hardest, followed by Sesa Sterlite. Hindalco, which has expanded its aluminium capacities at Mahan, also commissioned 1.5 million tonnes (mt) Utkal Alumina facility and Aditya smelter. However, the clearance for Mahan coal block is still pending and prospects on profitability from these projects where Hindalco has incurred huge investments, hinges on captive coal supplies. These sentiments reflected on the stock, which fell 9.6 per cent on Monday.

Sesa Sterlite fell 3.9 per cent. However, the fall relates to its subsidiary Balco that was likely to get one coal block allocated, the possibility of which has become uncertain now. Hence, it's the future earnings that have come into jeopardy that led to the correction.

In steel, Jindal Steel and Power, which fell 14 per cent, is one of the stocks that may see a larger hit. The company was expected to produce 12.5 mt from captive coal mines during FY15, a fourth of the 53 mt coal production expected from 33 captive coal mines.

Tata Steel's 4.8 per cent and SAIL's two per cent fall can largely be attributed to the weak investor sentiments, as the two are integrated players and hence unlikely to see major earnings impact due to this event, feel analysts. Similarly, JSW Steel, too, corrected four per cent even as it depends on imported coal to meet its energy requirements.

Giriraj Daga at Nirmal Bang Institutional Equities says that Sarda Energy, Prakash Industries and Monnet Ispat, too, might be impacted. Daga adds the volatility in the stock prices will increase, adding that 10-15 per cent further correction in metal stocks cannot be ruled out.