Will the rally in base metal stocks sustain? | Outlook Business
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Will the rally in base metal stocks sustain?
Aluminium, copper and zinc prices are at a multi-year high, on increasing demand and tighter supplies

Sanjay Jain, senior vice president, Motilal Oswal Securities

With aluminium, copper and zinc hitting multi-year highs on LME, Indian base metals stocks are likely to outperform riding on strong earnings growth this year. Apart from rising prices the companies in the Indian base metals space have a strong balance sheet and are generating good free cash flows. They will continue to generate strong free cash flows even if the base metal prices correct a little from here. So there is still a lot of value that investors can buy into, at current levels. Hindalco, in particular looks to gain from the recovery in auto demand in North America through its subsidiary, Novelis. Novelis contributes nearly 55% of their consolidated operating cash flow. In terms of earnings, Hindalco is expected to see an average earnings growth of 26.7% over FY17-FY19 and Vedanta’s earnings are estimated to grow at 46% over the same period.

Tarang Bhanushali, AVP, IIFL Investment Managers

We would not be investing in base metal stocks at current levels. We think it is better to wait for dips to invest in them. While we are positive on base metal stocks, we believe that the valuations are not that attractive for one to invest. We are also expecting a correction after the sharp rally in prices. We believe the prices have raced slightly ahead of the fundamentals. So there will be a correction which would be an ideal buying opportunity. While there is a lot of talk of illegal capacities being shut down in China and output cuts in the winter, it is still unclear on how much capacity will actually be shut down or what will be the extent of production cuts. Higher prices can always bring idle capacity back into business. So we continue to remain cautious and are likely to stay away from base metal stocks at current levels. 

 

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