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  • Feb 1, 2022 - Commodity Stocks are Back in Focus. 10 Companies to Add to Your Watchlist

Commodity Stocks are Back in Focus. 10 Companies to Add to Your Watchlist

Feb 1, 2022

Commodity Stocks are Back in Focus. 10 Companies to Add to Your Watchlist

In 2021, the buoyancy in commodity prices led to companies involved in the space reporting record level of sales and profitability.

Due to this, most of the commodity stocks produced huge gains. After languishing for years, these stocks found so much favour among investors.

With strong demand led by post covid recovery, Indian companies bagging deals from global behemoths, and MNCs looking to set up capacities in India, the outlook for commodity stocks looks rosier than ever before.

Let's take a look at stocks across different commodities.

These companies are the top players in their industry and should be on your watchlist for 2022.

#1 Steel - Tata Steel and SAIL

The big players in the steel industry are Tata Steel and Steel Authority of India (SAIL).

The world's economy is built on steel. Globally, an estimated 1.9 bn tons of steel is used annually for various uses.

Flat steel is typically used in automobiles and domestic appliances while long steel is typically used in construction and railways.

In 2021, there was huge hype about the commodity supercycle and whether it will deliver the next set of multibagger stocks. Both, Tata Steel and SAIL enjoyed heavy gains during the boom period.

In fact, gains were so heavy that stocks of the top 5 steel companies in India had average gains of around 300%. Even a PSU like SAIL gained over 350% after languishing for a decade.

All thanks to the projected demand for steel notching higher than anticipated which made the demand outlook rosier than ever before.

Currently, steel stocks have corrected a fair amount after their recent run-up.

Tata Steel and SAIL enjoy multiple tailwinds including higher coking coal costs for China and its removal of export rebate of US$50-70 per tonne, and captive iron ore mines.

Also, according to a report, Indian steel companies have seen sharp deleveraging in fiscal 2021. Tata Steel has reduced its debt significantly. The company plans to reduce more debt through operational cash flows in the next few quarters.

All in all, the demand is likely to stay strong as government focuses more on infrastructure.

If you're interested in steel stocks, check out the top steel companies on Equitymaster's Stock Screener.

#2 Iron - Vedanta and NMDC

The top two players in this segment are Vedanta and NMDC.

Vedanta's iron and steel vertical includes steel operations, iron ore mines in Goa, Karnataka, and Odisha, apart from a ferro-alloys producing unit; a nickel, cobalt, and cement unit; and a pig iron, metallurgical coke & port business.

Just last month, Vedanta had announced a complete overhaul of its corporate structure, including demerger, and listing of the aluminum, iron & steel, and oil and gas businesses as standalone entities.

Coming to NMDC, it's the largest iron ore producer of India. The company is scaling new feats and seems to be on a steady growth trajectory as it produced 3.95 tonnes and sold 3.4 tonnes of iron ore in the month of December 2021.

Last month, NMDC delivered the highest-ever production in any December month since inception. Just yesterday, the company increased prices of lump ore by Rs 300 a tonne and fines by Rs 200 per tonne, with immediate effect.

The effect of commodity supercycle is seen on NMDC's bottomline which surged 203% in the September 2021 quarter to Rs 23.4 bn. Even the topline spiked 205%.

All eyes will be on NMDC on 10 February when it will declare its December 2021 results.

#3 Coal - Coal India

With around 80% market share in coal production in India, Coal India is one such public sector undertaking (PSU) which dominates the coal segment.

Coal India possesses 48% of its reserves and accounted for around 83% of India's total coal production for fiscal 2021. In India, 57% of the primary commercial energy is coal-dependent and Coal India alone meets 40% of commercial energy requirements.

An up move in coal prices directly affects Coal India's stock. Since there was a severe shortage of coal globally back in September 2021, Chinese thermal coal prices spiked. And the same effect can be seen in Coal India's share price between August-October 2021.

Meanwhile, as an international agreement to reduce coal use was announced in mid-November, Coal India shares started their downtrend.

It's interesting to note that even with the world's largest coal reserves, Coal India consistently fails to meet the demand and overall expectations. It hasn't been able to meet its revised targets either.

In the past year, shares of the company have underperformed benchmark indices and gained just 8%.

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Even with good financials and a track record of strong dividend yields, the company has the reputation of underperformance (like ITC).

In the last ten years, Coal India has paid 18 dividends. Its dividend yield stands at over 10%. No wonder the company is one of the most overbought stocks in India.

#4 Copper - Hindustan Copper

Copper happens to be the most critical commodity in terms of base metals to watch.

It's called 'Dr Copper' by traders for the reason that without it, nothing is possible. Whether it's construction, electronics, automobiles, you can't do much without copper. So, it's a proxy play of industrial activity, both global and national.

And the stock that directly gets impacted by copper is Hindustan Copper. It's the most significant copper manufacturing, copper producing company in India.

As copper prices were on an upswing last year on the back of resumption of industrial activity after lockdowns were eased, Hindustan Copper shares woke up from a nearly 9-year coma and delivered multibagger returns.

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Hindustan Copper is set to benefit more as it has an indirect link to India's electric vehicle (EV) revolution.

How you ask? EVs consume 3-4 times more copper as compared to Internal Combustion Engine (ICE) vehicles. The transition to EVs will be the biggest demand drivers. What's more, copper is also used in the EV infrastructure.

As the company has been working on expansion plans at a tentative capex of Rs 55 bn, fundamentals are likely to remain strong.

To know more, check out Hindustan Copper's financial factsheet.

#5 Cement - UltraTech Cement, Ambuja Cement, and ACC

Cement, as a commodity, ranks second in volume among the top industrial products manufactured in the world.

So it's no surprise that India, the second most populated country in the world is also the second-largest manufacturer of cement.

And the large companies, UltraTech, ACC and Ambuja Cement, dominate the sector.

All the top players have plans for capacity addition, which bodes well for them as they stand to benefit from the current demand upcycle.

In a similar vein, here's what Tanushree Banerjee, Co-head of Research at Equitymaster, has to say on cement companies.

  • Although cement companies have been a big beneficiary of the sharp recovery in realty sector, cost pressures have kept their margins tepid for a while.

    With cost pressures easing off, the cement companies could see some margin upside in next few quarters.

    Plus, cement companies in India remain strong beneficiaries of the megatrends in infrastructure and corporate capex.

#6 Aluminum - Hindalco and NALCO

The two stocks which impact by aluminum directly are Hindalco and NALCO.

Just like Hindustan Copper, which enjoys tailwinds from the EV space, aluminum producers like Hindalco and NALCO too enjoy multiple synergies. Aluminum is a cheap metal used in manufacturing EVs.

In the non-EV segment, the average aluminum consumption is about 50-70 kg in a car and 20-30 kg in a motorcycle. Globally, on average around 250 kg of aluminum is used in each EV.

Aluminum is also used in the aerospace industry as it's light weight and helps reduce the overall weight of the structure.

NALCO is a pure play and has the highest leverage to aluminum prices. An increase in price of alumina, a raw material used to produce aluminum, also supports the company as it also sells alumina.

The company doubles it earnings on every US$400 a tonne increase in aluminum price.

#7 Lumber - Greenply Industries

In 2021, lumber prices spiked due to consistent rise in demand for homes and as there was tightening supply due to constraints forests.

As a result, lumber prices spiked in 2021. Shares of Greenply Industries have been on a roll since then.

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What multiple tailwinds does Greenply Industries enjoy you ask?

For starters, organised players like Greenply are consistently gaining market share with a clear consumer preference shift towards branded products.

Secondly, the industry is a play on rising residential and commercial construction activity throughout the country. Increase in urbanisation and higher disposable incomes are other drivers.

Further, the government's thrust on the construction of 100 smart cities and the positive impact of the transition to GST are critical factors to watch out for in the future.

Greenply Industries, being a market leader, has built a strong brand over the years catering to plywood and MDF segments.

To know more, check out Greenply Industries financial factsheet and quarterly results.

#8 Zinc - Hindustan Zinc

The stock that is directly affected by Zinc is Hindustan Zinc. The Vedanta group company has near monopoly in India in the zinc business.

But this isn't the only reason why the company should be on your watchlist. The company's fundamentals are strong. It focuses on cost control measures.

It has taken on debt in fiscal 2021 but it looks manageable with debt to equity ratio of 0.2.

Moreover, its track record of paying consistent dividends over the year have made it one of the best dividend paying stocks in India.

To capitalise on the increased demand for Zinc, Hindustan Zinc has planned expansion from 1.2 m tonnes per annum (MTPA) to 1.35 mtpa in the next few years.

Last month, Hindustan Zinc reported a 22.7% jump in its bottomline for December quarter to Rs 27 bn.

Here's what the company's CEO Arun Misra said after declaring Q3 results.

  • Hindustan Zinc is also geared to invest in world-class technologies and equipment to produce value-added zinc alloy products and provide matching international quality in the domestic market.

To know more about the company, check out Hindustan Zinc's latest quarterly results.

Equitymaster's view on commodity stocks

Here's what Aditya Vora, Research Analyst at Equitymaster, wrote about commodity stocks in one of the editorials.

  • To make money in commodity stocks, timing is the most important thing.

    Timing is an art which few people can master. This is why a majority of investors have lost money in commodity stocks.

    I believe in identifying fundamentally strong companies which have a strong runway for growth and are backed up by structural parameters.

    This is why I don't recommend participating in the hysteria in commodity stocks.

You can read the entire editorial here: Commodity Supercycle: What Goes Up Fast Will Come Down Faster.

Meanwhile, here's Co-head of Research at Equitymaster Rahul Shah:

  • I have no way of knowing how future prices of key metals and consequently profits of companies, will look like in a commodity supercycle.

    Therefore, for me, a 2-bagger or a 3-bagger commodity stock may do just fine. In rare cases, may be a 10-bagger.

    But a 100-bagger or even a 20-bagger is extremely difficult.

    I can, of course, speculate and so can you.

    But then call it speculation and not an investment. Also don't bet too much on it and keep it separate from your core investments.

Here's the link to the entire editorial: Will the Commodity Supercycle Create Another 1,000-Bagger?

Since you're interested in commodities, check out the below video by India's #1 trader Vijay Bhambwani. As per Vijay, 2022 is going to a great year for commodity trading.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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