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Volume IconDistressing times await metals and OMCs

The govt has levied duties on steel exports to curb inflation. But it came as a setback for the metal and oil marketing companies. Find out the impact of this policy decisions and the sector outlook

ImageHarshita Singh New Delhi
stock markets

The introduction of a 15% export duty on most steel products, up from zero, and an increase in levies on iron ore and pellets to 45-50% propelled a sharp slump in metal stocks on Monday.
Shares of Tata Steel, JSW Steel, Jindal Steel, SAIL and NMDC cracked up to 20% in intra-day trade.

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Analysts have now turned pessimistic particularly on metal companies as the recent policy moves are set to undermine their operational performance from hereon.
 
According to Bhavesh Chauhan, Research Analyst, IDBI Capital, hike in export duty negative for the sector and 15% duty hike means lesser realisations from exports. Steel companies’ exports range between 10-25% of sales, Chauhan says adding that margins, already under pressure, likely to shrink further. Downgrades will happen, evaluation awaited to see if there is any upside left.
 
Some brokerages have already initiated rating downgrades on leading steel stocks as the hike in export duties is expected to lead to a sharp correction in domestic steel prices. 
CLSA, for instance, has reduced domestic steel price estimates by 8-10%. On the back of lower steel prices, the brokerage has cut the Ebitda estimate for steel companies by up to 24%. It sees no near-term upside catalysts for the sector, other than a stimulus in China.

ICICI Securities, meanwhile, has highlighted the policy decision as extremely negative for the steel sector expecting a broad-based multiple de-rating for the industry. It has also lowered its ratings for most metal stocks. 
The brokerage has broadly assessed a likely Rs 5,000-7,000/te of impact on EBITDA for integrated steel players, while for unintegrated steel equities like JSW Steel the impact can be Rs 5,000/te.

“Due to the measures announced by the government, near-term correction in steel stocks is imminent. We believe the ramification of these decisions by the government will be felt widely across all parts of the industry,” says Motilal Oswal
 
According to Motilal Oswal, the export duty hikes can impact the valuation of the sector and companies’ ability to invest in capacity growth in the long term. 
On the contrary, the government has reduced excise duties on petrol and diesel by Rs 8 and Rs 6 per litre, respectively.

Following this, Parbhudas Liladhar has cut its FY23 EPS estimates for HPCL and BPCL by 56% and 40%, respectively, as elevated oil prices remain challenging. 
According to the brokerage, OMCs ability to reduce high marketing losses will be contingent on crude price correction, as high inflationary pressure will prevent meaningful retail price hikes despite excise duty cuts. [Parbhudas Liladhar]
 
Technical charts suggest shares of BPCL could see a bounce until their new 52-week low remains unbreached. 
The weekly chart of Hindustan Petroleum Corporation, meanwhile, currently signals a bearish trend. The stock price of Indian Oil Corporation is well-placed given its sustenance above the 200-day moving average level. 

On Tuesday, logistics player Delhivery’s market debut will be closely watched, while in the primary market chemical company, Aether Industries’ Rs 808 crores-IPO will open for subscription. 
Besides, Adani Ports, Balkrishna Industries, Balrampur Chini, Grasim, Ipca Laboratories and Metropolis Health will be on investors’ watch ahead of their Q4 results. That apart, stock-specific action and global cues will dictate the market trend.

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First Published: May 24 2022 | 7:00 AM IST

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