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Export duty on steel sends metal stocks into a tailspin but fuels auto shares

CNBCTV18 logo CNBCTV18 23-05-2022 Ajay Vaishnav

Metal stocks went into a tailspin on Monday, with the sector gauge Nifty Metal falling more than 6 percent in early trade. Coupled with a fall in global metal prices, India's move to impose a 15 percent export duty on steel dampened steel companies' growth outlook.

The imposition of export duty on steel has, meanwhile, improved the sentiment towards the automobile sector. Shares of automobile firms also gained due to a cut in excise duty on fuels.

Shares of Steel Authority of India (SAIL), JSW Steel, Tata Steel and Jindal Steel and Power were down 13-15 percent, dragging the Nifty Metal index by over 8 percent.

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Meanwhile, the auto sector gauge, the Nifty Auto index, traded well over 2.3 percent at 10.28 am. Only two of 15 stocks traded negative, while Ashok Leyland, Maruti Suzuki, Hero MotoCorp, Mahindra and Mahindra (M&M), TVS Motor, and Tata Motors gained between 1 percent and 6 percent.

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Brokerages' take on steel sector 

Brokerages have revised their target prices and earnings outlook on the steel sector. CLSA has downgraded the Tata Group metal stock to an 'underperform' rating from 'buy'. It reduced its target price to Rs 1,120 from Rs 1,645 apiece, a massive 31 percent downside.

Prabhudas Lilladher downgraded its outlook for the sector to 'underweight' "owing to the highly uncertain market outlook and overdependence on global markets" and cut the target price by 20-55 percent for steel companies. A revival in the Chinese markets raises the odds in favour of weakness in the sector, Prabhudas Lilladher said.

Metal prices have cooled off globally. Steel and aluminium prices are down between 12 percent and 26 percent from their March peaks.

ALSO READ | Opening Bell: Maruti Suzuki, Hero MotoCorp biggest gainers as Nifty reclaims 16,300 in volatile market

Expert views

Brokerage Jefferies is positive on auto stocks due to recovery in demand and cooling of raw material prices. It prefers stocks such as Tata Motors, Maruti Suzuki, TVS Motor, Ashok Leyland, Eicher Motors and Bajaj Auto from the space.

Market expert Prakash Diwan is also positive about the auto sector, particularly commercial vehicle manufacturers like Ashok Leyland.

"If there is any sector that would bounce back from lows and oversold zone, it would be the automobile. Freight costs hadn't moved up as much as fuel prices had. This makes things more viable for fleet operators. This would probably be much positive for them and not as much for passenger cars and two-wheelers immediately," Diwan told CNBC-TV18.

"It seems like Ashok Leyland is finally moving out from a sluggish operating band in terms of its metrics to something where things could lookup or continue to be strong. The firm has the right product mix to benefit, probably before Tata Motors and M&M joined the bandwagon. It will probably be the go-to stock for allocations to commercial vehicles within the auto pack," he said.

SMIFS Institutional Research's Amit Hiranandani said that automobile industry is likely to benefit due to the government’s action on excise and steel.

"Both the news items are sentimentally very positive for the auto industry because high steel prices hurt corporate earnings and impacted consumer demand due to back-to-back price increases," Amit Hiranandani, SMIFS Institutional Research, told CNBC-TV18.com.

—With inputs from CNBC-TV18's Sonia Shenoy

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