What's there in store for metal stocks? Amnish Aggarwal explains
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, Head-Research,, discusses the metal sector rally, noting raw material gains drove profits. Volume growth is crucial for further gains. Safeguard duties offer price support. MNCs are diluting stakes in Indian ventures due to valuation differences. Commitment levels and technology dependence are key factors. Stake reductions below 51% may signal reduced interest. The impact varies by company and sector.The metal stocks have already seen a rally and if you look at the numbers, the volumes in all the metal stocks have not been that encouraging for most of the companies. The margins have been there mainly because raw material prices have been benign. So, it is not the product pricing, but it is the raw material gains which have given them incremental profits and that is very well reflected in the stock prices because the stock prices have moved up by anywhere between 20% to 30% in the past two-three months.Now, incrementally, the volume growth has to pick up. Safeguard duty is responsible for giving some hopes that the prices will be sustained and the profitability will remain healthy. If the profitability remains healthy, we will not see any big cut happening in the stock prices of all the metal companies. But incrementally, from here on, the returns should be more moderate than what we have seen particularly in the last month or two.We have to look at this on a case-to-case basis because many of these companies or MNCs today are holding stocks not because they had come in very willingly or something, but because the government regulations at that point of time permitted them to hold. Today, in many of these large MNCs, the kind of valuations which are there in India whether you look at say some of these durable companies like LG Electronics or even Hindustan Unilever or others, the market cap seems to be disproportionately higher in terms of valuations because the Indian companies trade at a significant premium to where their MNC parents are trading today at. That is prompting some of these MNC parents to dilute some holding over there and reallocate their resources elsewhere globally where they see more growth or do some buybacks and things like that.Now, as far as growth is concerned, it depends upon how much commitment is there. For example, if there is some MNC parent which reduces a stake to say 15%, 20%, then they are gradually losing interest in that particular company and it also depends on the business of the company that how much that business is technologically or otherwise dependent upon the MNC parent. In many of the sectors where the companies need to get a continuous flow of technology from the parent, reduction of the stake below say a level of 51% in certain cases, I think that I would see that as negative.Now some of the companies which you showed in the chart, particularly some of these MNCs which are in the capital goods sectors like your ABB Siemens and many of these names, there the stakes are anywhere between say 51% to 75%, a couple of them I think maybe GE Vernova has also cut down stake below 51, although the company is growing well.But technically speaking, any company reducing the stake below 51% is not a very welcome signal because then you are not the majority holder of that company and in the longer term where your strategies are going to be, slightly difficult to say and that is how I would read and rest it all depends upon how much and what type of company it is, what type of technology transfer happens and how critical are the operations of the domestic entity for its parent.
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