 "The analysts now see earnings headwinds for metal companies")
Despite being among the cheapest stocks on the bourses there are few takers for shares of metals and mining firms.
The BSE Metal index, which tracks the market capitalisation of the top 10 stocks in the sector, is currently trading at a trailing price-to-earnings (P/E) multiple of 6.3 times (x) and a price-to-book value (P/B) ratio of 1.75x, a fraction of the benchmark BSE Sensex’s P/E multiple of 27.5x and P/B of 3.6x.
Additionally, the BSE Metal index’s dividend yield of 3.12 per cent is also more than thrice that of Sensex’s current yield of 0.96 per cent. In other words, an investment of Rs 1 lakh in the metal index is likely to yield an equity dividend of Rs 3,120 in financial year 2021-22 (FY22) while a similar investment in the Sensex will yield a dividend of Rs 960.
The metal index has declined 2.3 per cent since the end of September, against a 0.5 per cent decline in the BSE Sensex. And, most analysts remain underweight on the sector, as they see more downside for most of the top metals producers.
“The big rally in metals and mining stocks in the second half of 2020 and in the first nine months of the current calendar year was largely driven by a sharp rise in industrial metal prices, which are now in decline and are not expected to recover recent highs. This will weigh on the metal stocks,” says Dhananjay Sinha, managing director and chief strategist at JM Financial Institutional Equity.
According to him, metal producers such as Tata Steel, JSW Steel, and Hindalco Industries continue to see muted demand growth, despite record high net profits in recent quarters. “The demand for key industrial metals such as steel is growing in low single digits, which limits the scope for a further rise in earnings of metal companies,” adds Sinha.
The underlying earnings per share (EPS) of the BSE Metal index has risen 116 per cent since Q3FY21, against a 27 per cent rise in the underlying EPS of the Sensex.
The analysts now see earnings headwinds for metal companies. “There is a lot of uncertainty about the earnings trajectory of metals and mining companies over the next 12 months due to factors such as their rising input costs, downward pressure on metal prices, and growth headwinds for the global economy,” says Shailendra Kumar, chief investment officer at Narnolia Securities.
According to him, investors are better off betting on user industries such as automobiles, auto ancillaries, and consumer durables firms that could see margin expansion due to recent decline in metal prices. “In the last 3-4 quarters there was a shift in profits from metal users to metal producers. This process is now reversing as metal prices correct,” he adds.
Some analysts, however, see a tactical opportunity in metals stocks on the back of global recovery in equity prices as the fear of the Omicron variant of coronavirus recedes. “If the Omicron variant turns out to be much less severe than earlier expected, there would be a global rally in high-beta stocks and metal stocks could be the biggest beneficiary of this trade,” says G Chokkalingam, founder and MD of Equinomics Research & Advisory services.
