Market watch: Three metal stocks that you can invest in right now

Despite a remarkable rally in equity markets in the previous financial year, the metal space has trailed gains in benchmark indices. The lacklustre performance of metal stocks in 2014-15 could largely be attributed towards slowdown in China and European economies. Further, the shortage of domestic coal supply has hurt margins and production of Indian aluminium smelters.

The data shows that the S&P BSE Metal index kicked off the financial year 2014-15 on positive note as the index jumped 28 per cent to 12,929 during April 1 and July 10. However, from there onwards it tanked 24 per cent to 9,466 on March 31 against 12,452 on July 11 last year. The key benchmark index Sensex gained 25% during the previous financial year.

Among the sectoral indices on the Bombay Stock Exchange, the S&P BSE Metal index stood the top performer in April 2015. It gained 2.71 per cent to 9,800.97 on April 30. The BSE Sensex declined 4.42 per cent to 27,011 last month.

Tarang Bhanushali, AVP, Research, IIFL, says, "Earlier, the metal sector remained under pressure due to de-allocation of coal blocks, regulatory clampdown on iron ore mining and rising expectations of demand slowdown in China. In the ongoing financial year, we do not expect any major revival in the domestic metals sector, as commodity prices have declined sharply due to pressure from cheaper imports from China and the appreciation of the US Dollar against major currencies. A sharp depreciation of currencies of some countries (Russia, South Africa) has led to an increase in supply of material to the global market. In addition to this, demand from China has been slowing down."

However, Nikhil Kamath, director, Zerodha, says, "Metal stocks at current levels look like value buys, with interest rate cuts, the demand for housing and infrastructure is likely to revive which in turn should benefit Indian companies. Lower interest rates will directly benefit highly leveraged metal companies, which for instance pay 40-50 per cent of their operating profit in interest expenses."

The sector has witnessed many important changes in regulatory framework from coal deallocation, coal auctioning, passage of Mines and Minerals (Development and Regulation) Amendment Bill and the sharp appreciation of the US dollar against global currencies.

Factors to watch

Global growth cycles, interest rates, demand from China are some of the few factors to keep in mind while investing into the metal sector.

Since the metal sector heavily depends on the global commodity prices, one has to carefully monitor global supply-demand factors to take a view on the sector. These would include looking at the demand side which is a factor of growth in the global economies, existing metal inventory in the system and price movement of substitutes.

The supply side depends on the marginal cost of production of mines, and any geo-political events which could temporarily impact supply besides coming up of new mines are other factors. A balance between the demand supply dictates the movement of commodity prices.

Ankit Agarwal, vice president, fund manager, Centrum Broking, says, "Domestically, one has to closely monitor developments on the regulatory front with respect to royalties, environmental clearances, taxes and levies and allocation of new mines. A combination of these factors would influence the investment strategy in the sector."

Investment Options

With the help of market experts, we tried to find some metal stocks which can give you lucrative returns in the next 24 months.

• JSW Steel: JSW Steel has corrected sharply in the last four months due to rising concerns over dumping of Chinese steel, subdued domestic demand and decreasing domestic iron ore production. The share price of the company declined 12.5 per cent to Rs 932.35 on April 30 from Rs 1,065.20 on January 1. Bhanushali of IIFL, says, "We believe that the correction in the stock is overdone. and we expect the scenario to improve in 2015-16. We believe domestic demand would pick up from 2015-16 as revival in the domestic economy gains steam, which in turn will lead to an increase in infrastructure spending. We expect JSW's bottomline to grow strongly over FY14-17 on account of increased output from Dolvi plant, substitution of expensive domestic ore with cheaper imports, cost rationalisation exercise at Dolvi and superior product mix."
  

• Nalco and Hindustan Zinc: Since the beginning of the ongoing calendar year, the share price of Nalco slid 15 per cent to Rs 47.45on April 30. However, the share price of Hindustan Zinc increased marginally 0.6 per cent to Rs 169.30 during the same period. Sanjay Jain, senior vice president, research, Motilal Oswal Financial Services, says, "National Aluminium Co (Nalco) and Hindustan Zinc are only two exception with zero debt and huge surplus cash on their balance sheet. These are now deep value buy while cash on balance sheet accounts for nearly half of market cap."