Aditya Velekar will bet on 4 non-ferrous metal and steel stocks

Aditya Velekar, AVP, Axis Securities, Says non-ferrous metals, especially aluminum, show strong potential due to their role in electric vehicles and renewable energy. Axis Securities favors Hindalco and Nalco, for Hindalco at Rs. 765 with a target price, which is also pursuing expansion projects for future growth. In the steel sector, they view JSPL positively, even though it is not in their active coverage. Axis on Tata Steel Rs. Maintained Buy rating with target price of 175. A positive development in China could lift commodity and steel stocks.

We have seen some false starts from China before. They came out with excitement 1.0, 2.0, which didn’t really work as we expected. Now additional steps are coming. What are the chances that this too will be empty and will not be able to increase demand massively? What is your base case scenario right now?
Aditya Welekar: The China Economic Work Conference is underway. As described by the former chairman of SAIL, there are many problems and domestic demand in China has not picked up yet. So at 100 million tonnes, exports from China have increased by 20%. It is also about 5.3% of GDP. Subsequently, domestic Chinese steel production is 850 million tons, down 3%. All these factors suggest that domestic demand in China has not yet picked up materially despite the stimulus measures they took in September.

The ongoing conference will clarify the goals they set for CY2025. If they set a 5% GDP growth rate, analysts will focus on fiscal stimulus and at the same time they will focus on the fiscal deficit target set for the next calendar year. So far, they have avoided direct fiscal deficit stimulus and so far the fiscal deficit has been capped at 3%. We have to see if they soften on that and increase the fiscal deficit to 4%, so that will be a key factor that will be a key watch point for us.

What is the outlook when it comes to challenges for the entire metal sector? Do you anticipate there will be some road bumps down the line?
Aditya Welekar: There are a couple of challenges. Number one is high exports from China for steel and non-ferrous metals. And then there’s a lot of uncertainty about trade tariffs and what kind of decisions Trump makes when he takes office in January. If all his policies are implemented and he does what he says, he will impose a 60% tariff on Chinese imports. All of these policies will be inflationary and will put pressure on the path of inflation, freight rate decisions, and ultimately the US dollar index, which will lower commodity prices.

Therefore, there are two broad sets of challenges. Number one is domestic consumption growth in China is a concern, and then US policies — how that plays out and whether that inflation remains. The entire sector will have to navigate these two major news flows in the next two-three months. And only then we will get a clear picture of how the sector will flow.

The steel industry has been asking for safeguard duty for a long time and now we have heard some positive comments from the ministries as well. What could it mean if it passes?
Aditya Welekar: Currently, Indian HRC prices are trading at a discount to Chinese import parity prices. Therefore, there is a comfort in adding the safeguard duty and there is little scope for HRC prices to rise from here as they are trading at a discount to Chinese prices. But domestically, if the government goes ahead and imposes more than 7.5% and additional customs duty on Chinese imports, it will lead to inflation in India.

Another factor is that there is no customs duty from the FTA, where we have free trade agreements with countries like Vietnam and other Southeast Asian countries, and steel from China may be coming through these countries. These are the points where cheap Chinese steel can come to India. So, the government has to take a decision keeping in mind what impact it will have on domestic inflation, and what kind of steel is coming through the FTA and what kind of steel is coming from China. Indian HRC prices are trading at a 5-6% discount to Chinese HRC prices, with little room for domestic steel mills to raise prices.

If I were to ask you for a pecking order in stocks at this time, what are the top recommendations?
Aditya Welekar: Structurally, non-ferrous still looks good as a pack inside metal because overall, aluminum as a commodity has a good amount of exposure to electric vehicles, solar, renewables themes. So, we like stocks like Hindalco, Nalco. We have a target of Rs 765 on Hindalco. And Hindalco has a good amount of expansion projects which will fuel future growth.

In the steel space, we like JSPL, although it is not under our performance coverage, but JSPL has a good amount of long steel sheet product portfolio and 50% of its product is long steel and we have recently seen long steel prices surpass flat steel prices. is, while conventionally flat steel prices are always calculated at a premium to long steel rates. But now the situation is reversed. There is good demand for construction in India and JSPL is benefiting from it.

At Tata Steel, we have Rs. It has a Buy rating with a target price of 175. Globally despite all these negatives that we are seeing from China and uncertainty in the US, steel stocks, valuations are still at mid-cycle levels and prices have consolidated in a narrow range. Therefore, any positive news from China would be a good bet for commodity and steel stocks to rally from these levels.

All steel and non-ferrous companies have expansion projects. Tata Steel has a 5 million tonne Kalinganagar expansion project. All this will come to fruition in the next few years. We think this is a good level where valuations are not too expensive and if there are any positive moves from China and if US trade uncertainties ease, the overall metal pack will do well.