Metal stocks in the limelight

Wed, 29 Dec 11:30 am

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Indian indices were trading in the green on the back of buying interest in heavy weights over the previous two hours of trade. Stocks from the metals and consumer durable space are trading firm, while auto and capital goods stocks are trading weak.

The BSE-Sensex is up 80 points while NSE-Nifty is trading 21 points above the dotted line. BSE Midcap is trading up by 0.6% while the BSE Smallcap index is trading 1% above yesterday’s closing. The rupee is trading at 45.10 to the US dollar.

Hotel stocks are trading mixed with Country Club and Taj GVK trading firm and Oriental Hotels and Hotel Leelaventure trading weak. As per a leading financial daily, hotel room rates are set to fall in 2011 and 2012. The fall in rates is expected to be 5-10% in 2011 and 13-18% in 2012. The reason behind this is that a deluge of rooms is expected to hit the markets soon resulting in a supply demand mismatch. During the boom of 2007, many new hotels were planned and this inventory of rooms will become operational in 2011 and 2013. This would result in fall in occupancy levels and as a consequence a fall in room rates. The cities likely to be affected will be National Capital Region (NCR), Bangalore, Hyderabad, Chennai, Pune, Jaipur, Kolkata and Ahmedabad. However, room rates in Mumbai and Goa are expected to remain firm due to high demand and low incremental supply.

We believe that supply demand cycles are part of the hospitality business. If oversupply continues for an extended period of time then hotels will cut rates. However, one cannot ignore the fact that demand is also rapidly rising with influx of foreign travelers, robust economic growth and the arrival of the Indian traveler. Hospitality is a long-term business and should be considered from that perspective.

Metal stocks are trading firm led by Bhushan Steel and SAIL. However, Sesa Goa is trading weak. Tata Steel plans to sell its UK based Teesside Cast Products (TCP) plant for US$ 500 m within two months. The proceeds from the sale will be used to pay off the European debt lying on its books. It may be noted that earlier, Tata Steel’s UK subsidiary Corus had signed a MoU with Thailand’s Sahaviriya Steel Industries (SSI) to sell the TCP unit. The company expects to reach the conclusion by the end of February.

Separately the company is also looking to acquire a few mining companies provided the valuations are reasonable. However, right now most of the mining companies are trading expensive due to high Chinese demand and thus acquisition in the mining space seems a distant possibility right now. Nonetheless, the company is constantly exploring options in overseas markets to acquire raw material assets so as to keep input prices under check.