China’s Central Economic Working Conference, one of the most important events for metals, appears to advocate neutral policy stance for 2023. Post easing cycle in 2020 and tightening in 2021, China is likely to maintain neutral policy bias for second consecutive year (2022 and 2023), as per brokerage and research firm Ambit.
“Chinese credit impulse bottomed at 23-24% late 2021 but should remain at 25-26% through CY23, well short of 32-33% peak in late 2020. China is conscious it needs to stabilize growth and diffuse systematic financial risks, but also cognizant of high leverage in the system, and doesn’t want to open floodgates,” the note stated.
Lagged impact of neutral/partly-accommodative policy and opening up of economy should spur some revival in metals demand/margins in FY24. But significant rebound appears unlikely in FY24. Metal company margins/ROE should nonetheless improve in FY24-25 (when new volumes come in FY25) vs 2HFY23, it said. Ambit’s preference order among Buys for metal stocks – Tata Steel>Hindalco>JSW Steel>NMDC. Whereas it has Sell rating on JSPL.
“Investors pay attention to P/B during downturns, but we believe historical 0.5x P/B was just coincidental and reflected value of equity as a call option in distress. Stocks just find an asset value at bottom, and we believe that bottom for most metals stocks, based on Black-Scholes option value should fundamentally be the bottom that we witnessed in July 2022,” the brokerage house added.
Book value would increase, while most companies would continue to delever even in the downcycle, unlike in previous cycles. Incremental RoCE should improve on low-payback brownfield projects. Companies are moving closer to optimal capital structure, implying lower WACC. These suggest much higher economic value added (EVA) vs previous cycles, hence the argument for re-rating, it said.
“Metals have had to contend with multiple headwinds the past one year. However, some headwinds could potentially turn into tailwinds in the near future,” Ambit added.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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