Hindalco, Vedanta, JSW Steel on your buy list? Wait for a dip, say analysts

The run-up in the stock prices of metal companies, analysts said, has largely been driven by tighter supplies in the global markets, coupled with hopes of improving demand, especially in China

Stocks of metal companies have been buzzing at the bourses for quite some time now. The Nifty Metal index, the gauge of metal companies, has soared 40 per cent over the past six months, as against a 15.6-per cent surge in the Nifty50 index.

Individually, Hindustan Copper stock has soared 155.4 per cent, while stocks of Jindal Steel and Power, Hindustan Zinc, NMDC, Vedanta, Steel Authority of India (SAIL), and National Aluminium Company (Nalco) have rallied between 50 per cent and 93 per cent during the period.

In calendar year 2024 (CY24), the index has gained 16 per cent as compared to a 3-per cent gain in the frontline benchmark Nifty50 during the period.

Given the limited scope of price rise across categories, analysts suggest investors dabble into the metal pack selectively, and on dips.

At the fundamental level, the run-up in the stock prices, analysts said, has largely been driven by tighter supplies in the global markets, coupled with hopes of improving demand, especially in China.

“China's gross domestic product grew 5.3 per cent in Q1CY24, accelerating slightly from the previous three months and beating estimates. Besides, its manufacturing activity expanded at the fastest pace in 14 months in April, driven by a solid uptick in new export orders,” highlighted Deepak Jasani, head of research at HDFC Securities.

Additionally, improving manufacturing activity across the US, Germany, and the UK is further driving metal demand globally, he added.

Meanwhile, supplies have remained tight due to muted production, crisis in the Red Sea, and the ban of Russian Metal on London Metal Exchange (LME).

Strong domestic demand

The domestic metal market, as per analysts, is experiencing a surge in demand driven by the flourishing real estate sector, the government's infrastructure initiatives, and increased spending on defense.

According to rating agency ICRA, the domestic demand growth is expected to remain at 10 per cent in FY25, significantly outpacing the expected growth of 2 per cent in global demand.

Metal prices, across categories, meanwhile, have surged to multi-month highs, propelled by the robust demand recovery. LME Copper, for instance, breached $10,000 per tonne for the first time since April 2022.

Aluminium prices, on the other hand, have been hovering in the range of $2,400-$2,500/tonne on LME, after quoting around 20-month highs of $2,725 in April. Back home, Aluminium prices hit a 23-month high of Rs 255.50 per kilogram in April this year.

On the contrary, steel prices have been on a downtrend. China's domestic hot-rolled coil (HRC) was around $582/tonne at the end of April, the lowest since October 2023.

India's HRC prices, meanwhile, stood at Rs 53,400/tonne at the end of April, nearly unchanged month-on-month.

Analysts said domestic HRC prices are now at a premium to import prices from South Korea/Japan and at par with import prices from China, suggesting limited scope of rise going ahead.

For base metals, too, analysts observe any delay in interest rate cuts by the US Federal Reserve, along with strengthening of the US dollar, may stall the ongoing rally.

"The impact of sanctions on Russian metal on the LME has been priced in by Aluminium. Though the prices may not drop to CY23 levels, we believe prices above $2,600-2,650 may not be sustainable. Similarly, iron ore is also expected to remain range bound," said Parthiv Jhonsa, lead analyst for metal and mining at Anand Rathi Institutional Equities.

Sanjay Moorjani, research analyst at SAMCO Securities suggests investors who added these stocks to their portfolios at lower levels, may continue holding onto their positions for now.

“However, new investors should be mindful of the current valuations and consider a more selective approach at lower levels," he said.

Parthiv Jhonsa of Anand Rathi, too, suggests picking domestically strong stocks. He has 'Buy' on JSPL, Coal India, Hindalco, and JSW Steel.

Kotak Institutional Equities has an 'Add' rating on Hindalco (target: Rs 675), but 'Sell' on Vedanta (target: Rs 320), Nalco (target: Rs 130), and Hindustan Zinc (target: Rs 310).