Metal stocks continue to melt

Thu, 1 Jul Closing

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Metal stocks continue to feel the heat of a feared Chinese slowdown, as these led the Indian markets lower today. Selling was also seen in stocks from the realty and automobile sectors. On the broader BSE, one stock lost for every one that closed in the positive.

The BSE Sensex and NSE Nifty closed with losses of around 190 points (1.1%) and 60 points (1.2%) respectively. However, mid and small cap stocks weren't hit so badly. In fact, while the BSE Midcap index closed down by 0.4%, the BSE Smallcap index closed with marginal gains of around 0.1%.

Among other key Asian markets, China (down 1%) and Japan (down 2%) led the losers' pack. European markets have also opened the day in the negative.

Metal stocks maintained their weakness today as well. Key losers included Sterlite, Tata Steel, and JSW Steel. Selling in these stocks has been aggravated by slowdown worries in China, which is likely to take a toll on commodity prices. China is targeting to cool down its economy. And one way it is doing it is by tightening credit to industries. A Chinese slowdown we believe will negatively impact the demand and prices of commodities. And since most commodity prices are globally benchmarked, the impact will be felt by Indian companies as well. In such a scenario, it will be interesting to see how the demand from Indian commodity consumers stacks up.

Auto stocks also closed weak today. Key losers here included Tata Motors, Maruti, and Hero Honda. These stocks bore the brunt of profit booking after the gains seen over the past few weeks. We see these companies benefiting in the medium term given that commodity prices are expected to fall on China worries. This will help these companies improve their operating margins, which will also be aided by robust demand for automobiles that has picked up pace over the past few months. However, as we stand now, auto companies are busy raising prices of their vehicles owing to high metal and rubber prices. The price of natural rubber, the main raw material for tire makers, has increased 29% so far in 2010.

Telecom stocks closed mixed today. While selling was seen in Reliance Comm and MTNL, buying interest marked trading in Idea Cellular and Bharti Airtel. Earlier during the day, the Wall Street Journal carried a report that suggested that Bharti expects a continued decline in average revenue per user (ARPU) given that it is adding more rural users with lower paying capacity. The company already has almost 90% of its new subscribers coming from the semi urban and rural markets and it expects to maintain this ratio in the future as well. The company chief, Mr. Sanjay Kapoor, also sees a major shake-out within the industry. This is given his belief that small players cannot sustain a price based competition for long.