PSU metal, mining stocks on a downward spiral
Flawed government policies and fears of a fresh round of share sales has led to stocks of state-owned metal and mining companies hitting five to seven year lows.
All these companies have corrected by over 70% from their highs in 2007-08 and with falling commodity prices, the trend is likely to continue for the next few quarters, according to analysts.
Investors are now avoiding these stocks despite the strong balance sheets of these companies and attractive valuations.
Not only are these companies below their book value, but most of these companies are also debt-free and have cash and equivalents equal to more than half of their current market capitalisation.
"People are worried that there could be one more round of offer for sale, which is why there has been low investor interest," says Sankaran Naren, chief investment officer, ICICI Prudential. In the last one year, the government has carried out several stake sales in government-owned companies at a steep discount of 20-30% to the market price, which did not go down well with investors.
"No government in the world would sell stake at such distressed valuations. The government policies have hurt investor confidence and created negative sentiments towards these companies," said Deven Choksey, managing director at KR Choksey Shares and Securities, while adding that the weakness in the rupee will further compound worries.
What is also worrying investors is the poor return ratios of some of these companies, which means that these companies are not able to generate returns on the investments. For instance, the return on capital employed for Nalco is 4.9, while for OMDC it is 1.6, SAIL is -3.5 and MMTC is -2.5, much lower than the current interest rate.
And with the slowdown in the Chinese economy, the biggest consumer of metals, earnings of these companies could get further impacted. Due to the lower demand from China, the prices of all metals – iron, steel, copper, gold and silver – have corrected 15-35% since the start of the year, resulting in a lower average selling price per unit.
Although the macro economic environment impacts all companies alike, the performance of state-run companies has been disappointing compared to private firms. The stock price of SAIL is down 62% in the last five years, while JSW Steel’s and Jindal Steel’s have fallen by close to 20%.
however, investors reckon that greater clarity on utilisation of cash with these companies will provide some support to these stocks. The net cash per share for NMDC is 51%, for OMDC 50%, Nalco 45% and for MOIL 68%, which is significantly high.