These stocks, some of which are close to their annual highs, have been rising on rupee depreciation and increasing demand from China. “The currency decline helped these stocks, as the quantum of metal imports reduced drastically, increasing domestic demand. Besides, the September results were better than expected and recently, we have seen a pick-up in Chinese demand,” said Nirmal Rungta, director and head (private client group), CIMB Securities.
Since April, the rupee has fallen 15 per cent. Therefore, it is now more expensive to import goods and commodities, including metals, thereby increasing the demand for metals produced domestically. Analysts expect metal prices to follow a rising trend due to the increased demand and a liquidity flush created by delay in tapering the third round of the US Federal Reserve’s quantitative easing (QE3) programme.
“The risk of QE3 tapering is off the table since Janet Yellen has been anointed the next United States Federal Reserve chairperson. The sustenance of easy monetary policies by developed nations is thematically positive for the metals sector,” said Saurabh Agrawal, deputy vice-president (research), Kotak Securities.
Among institutional investors, buying interest in these stocks has been on the rise since August, when benchmark indices touched a low of about a year. Since then, stocks such as JSW Steel, Tata Steel and SAIL have risen at least 50 per cent. During this period, the BSE Metal index rose 26 per cent, while the BSE Sensex gained about six per cent.
“A lot of long positions have been created, but the quantum of long positions is not over-heated. We expect stocks such as Hindalco to see significant upsides from these levels,” said Siddharth Bhamre, head of derivatives, Angel Broking.
Ashish Chaturmohta, head of technical and derivative analysis, Fortune Equity Brokers, agrees. “These stocks will not become over-bought because some of these stocks have declined about 80 per cent in the last one year. The rise in prices is yet to catch up with that decline. In this sector, there are several stocks that haven’t yet participated in the rally,” he says.
“The upside for stocks such as Tata Steel and JSW Steel may be limited from these levels,” he adds.
Soon, traders may seek to unwind some of the positions in these stocks, with analysts saying stocks such as SAIL and Hindalco could be better buys at current levels. “A lot of institutional money has also been pouring in because the sector was underinvested for long. After being bullish for several months, we have turned cautious, following the sharp rally,” said Agrawal from Kotak Securities.