Meltdown in China has metal stocks sinking in India

MUMBAI: Shares of Indian metal companies have slipped into a bear market on concern the slowdown in the Chinese economy would drag down prices further. Tata Steel, Hindalco, Jindal Steel and SAIL have dropped between 30 per cent and 50 per cent this year so far as analysts paint a bleak forecast for these stocks in the foreseeable future with companies in this sector struggling with high debts.

"We have underweight rating on the entire metal sector, because earnings visibility is blurred over medium-tolong term," said Pankaj Pandey, head of research, ICICIdirect. com. "The demand and prices of commodities continue to remain weak due to the slowdown in China, which is a concern for the companies." Jindal Steel & Power has plunged 52 per cent this year so far, Vedanta has dived 41 per cent, Tata Steel has declined 38 per cent, and Hindalco has dropped 33 per cent. The ET Metal Index fell 26 per cent over this period.

Investors are worried about the metal companies’ high debt levels. Tata Steel has 2.3 times debt to its equity, Hindalco has 1.7 times debt to its equity, while JSW Steel has 1.5 times debt on books to its equity, according to ETIG database.



"We don’t have exposure to metal stocks in most of our portfolio schemes, because the slowdown in Chinese economy has adversely impacted the sector leading to alot of uncertainty," said Harsha Upadhyaya, CIO - equity, Kotak MF. "Apart from global demand and price concerns, Indian metal companies have additional burdens such as high leverage and ongoing litigations."

"When things are looking bad, one is generally tempted to believe that the bottom may not be far. Vedanta, Hindalco and Nalco are trading at 0.7 times price to book (P/B) value and look cheap. But these could be value traps," said Rakesh Arora, MD and head of research at Macquarie.