Shares of Steel Authority of India Ltd. (SAIL) have been declining for the past 3 weeks as this Maharatna PSU has lost over 8% of its value in August alone!!

 

SAIL, one of India’s largest steel manufacturers, was performing fairly well by the end of 2022. It grew over 24% in early 2023 as China was coming out of its strict COVID policies and the Chinese government was stepping up to support the country’s real estate sector. This was a positive for the metals sector, especially India since it is the largest exporter of steel to China. Declining prices of coking coal and rollback of steel export duties assisted the rally.

However, the upward momentum was lost in the latter part of January 2023 as both SAIL and the Nifty Metals index tanked. By the end of February 2023, the Nifty Metals index had fallen over 23% while SAIL was down over 5%. This decline came due to recession fears in major economies, weaker demand, and poor financial results.

These factors, coupled with the strengthening of the Dollar, pressured metal stocks till May 2023. The recurring rate hikes made debt more expensive for metal companies as poor demand weighed on these stocks. Poor demand kept SAIL range-bound for June 2023, as buyers or sellers could not take the stock beyond its range of Rs 80-85 per share.

The metals index saw a surge in the latter part of May 2023 as buying picked up and the index began moving upwards as India’s metal stocks were underperforming when compared to global stocks which resulted in buying pressure. SAIL saw an uptick in buyers around mid-June when the Chinese government announced a surprise rate cut to support economic recovery. 

SAIL’s share grew throughout the period as it reached a 15-month high of Rs 96.15 per share on 1st August 2023. SAIL surged around 13% in 1.5 months as China’s bid to support economic recovery fuelled buying in the stock and helped it breach 4 resistance levels! 

 

However, the stock registered a sharp decline on the very next day as the Nifty Metals Index tanked over 2%! Strengthening in the dollar and a sharp fall in the prices of non-ferrous metals on the London Metal Exchange (LME) resulted in a downward pressure. Sentiments were subdued for the next few sessions but there was no definite sign of reversal in its uptrend.

However, in mid-August 2023, SAIL announced its Q1FY24 results which resulted in the stock wiping out over 6% of its value in a single week! All major metal stocks reported a significant decline in profits as higher input costs eroded the company’s bottom line and the Nifty Metals Index also fell over 3%.

What’s the future outlook??

Fundamentally, the company’s latest performance was poor. Revenues saw a marginal growth of 1.3% YoY as 5 of its steel plants reported lower revenues annually. Expenses surged 5.6% YoY due to higher financing and depreciation costs. Due to exceptional one-time gains, such as the sale of old fixed assets, the company managed to report a profit of Rs 212.48 crores, down 74% annually and 82% sequentially.

 

Technically, Trading below 5,20,50,100 but close to the 200-day average. With the RSI at 38.01, the stock is close to its oversold zone, which could incite buying pressure in the coming sessions. Buyers tried to push the stock past its resistance at Rs 86.95 [marked in blue], but sellers pushed the stock back down as SAIL appears to be trapped in a range between Rs 84-87.

The Metals demand is currently subdued in all major economies. China, which accounts for almost 50% of steel trade, is going through a bad phase as its real estate is in trouble due to the troubles of the Evergrand Group, its second-largest real estate developer. 

With recession fears hanging over both the UK and the US, there isn’t much demand on a global scale. Local demand is expected to remain robust due to the Indian government’s push for infrastructure, but demand is expected to remain weak on a global scale. 

Therefore, the stock of SAIL is expected to be range-bound for the coming sessions as any move in either direction would be on account of changes in global trade such as the easing of export duties, announcement of a stimulus package by the Chinese government, etc. as such news would be able to effectively break the deadlock of buyers and sellers.