Metals Stock have been favourites of the markets since the last 1 year with Tata Steel being up 3x in 1 year, JSW Steel being up 298% & JSPL getting re-rated by giving returns of > 270%. Steel has been witnessing a supply chain shock in the form of delayed supply response to demand recovery. As a result, inventory levels remain low, particularly in the US and Europe.

Neelkanth Mishra of Credit Suisse in the latest India strategy note says that they will reverse Overweight on metals (added in Dec-20 and earlier), as P/B relative to the market is near 10-year highs, the current surge in
apparent demand is an extreme inventory cycle and not a super-cycle.

Slower steel capacity increases due to ESG regulations are not sufficient to justify holding on, particularly given the Tata Steel profit surge is iron-ore driven and should correct. Aluminum should do better than steel going forward, given extreme price ratios.

In replacement of the Metals names, they add Asian Paints Ultratech as its trading at low relative P/B for the sector with concerns on adverse seasonality and weak low-income discretionary demand offset by firms-specific factors. Cement should benefit from lower costs of globally priced inputs; sector P/BV is at an 11% premium to the market, well below average as near-term concerns on adverse seasonality and weak discretionary demand are offset by firm-specific factors for example steady share gains.