Mettle in metal: Why the Nifty Metal Index matters

In the early 1900s, JN Tata, guided by American geologist Charles Perin, ventured into the remote Chhota Nagpur plateau. Despite the dense forests and gruelling journey on a mule, JN Tata’s vision was unwavering. Standing by the Subarnarekha River, he envisioned a bustling industrial town, which became a reality with the establishment of a steel factory in 1907. This laid the foundation for India’s industrial growth. Today, the Indian stock market reflects this legacy, with the metal sector emerging as a key player. Driven by robust demand, government support, and a positive economic outlook, the sector has significantly contributed to the market’s upward trajectory. For investors seeking exposure to this thriving sector, the Nifty Metal Index offers an attractive avenue.

Understanding the Metal Sector

The metal sector forms the backbone of the Indian economy, encompassing ferrous (iron ore and steel) and non-ferrous metals (aluminium, zinc, copper), along with precious metals. It plays a pivotal role in various industries, from construction and infrastructure to automotive and aerospace. 

India’s significance, represented by its stature as 2nd largest crude steel producer, 4th largest iron ore producer etc., is buoyed by the metal sector --- the driving force for domestic and global economic development. This is reflected by the metal sector’s stock market performance that shows robust returns of 23% year-to-date in 2024 and 19% in 2023. As India’s economic expansion is fuelling growth in the metal sector, the sector has demonstrated resilience and strong performance, particularly in recent years.

A gateway to the sector

The Nifty Metal Index is designed to reflect the behaviour and performance of the metals sector (including mining). The Nifty Metal Index comprises a maximum of 15 stocks that are listed on the National Stock Exchange (NSE). These companies are selected from the Nifty 500 based on their market value, ensuring a broad representation of the sector. The index composition ensures that no single company has more than 33% weight, and the top three companies cumulatively do not exceed 62% of the index.

The Nifty Metal Index serves as a benchmark for the metal sector, tracking the performance of the top metal companies out of the Nifty 500 eligible universe. It provides investors with a diversified exposure to the sector’s leading players i.e. iron and steel (53%), aluminium (17%), trading - minerals (12%), diversified metals (9%), industrial minerals (4%), zinc (2%), and copper (2%). This enables investors to participate in the metal growth story. 

In the last decade, despite events like the NBFC crisis, demonetisation, the COVID-19 pandemic, the Russia-Ukraine war, the Nifty Metal TRI (total return index), while experiencing periods of volatility, has outperformed the Nifty 500 TRI over 1, 3, 5, and 7 years periods by 200-800 basis points. Calendar year wise, Nifty Metal has outperformed Nifty 500 five times in the last 10 years.

Several factors contribute to the positive outlook for the metal sector in India. The country’s rapid economic expansion fuels demand for metals across various industries. The government’s focus on infrastructure development further boosts this demand, creating a favourable environment for the sector’s growth. Additionally, India’s position as a major global player in steel and aluminium production strengthens its prospects in the international market.

Favourable policies, attractive valuations

The Indian government has implemented policies to promote the metal sector’s growth. These include allowing 100% foreign direct investment (FDI), encouraging private ownership of steel operations, and reducing customs duties on critical raw materials. The Production Linked Incentive (PI) scheme for specialty steel further incentivise domestic production. These measures collectively create a conducive ecosystem for the sector’s expansion. For instance, India’s steel production is expected to reach 300 metric tonne capacity per annum by 2030 compared to the current 150 metric tonne, effectively doubling the demand

Despite the promising outlook, the Nifty Metal Index currently trades at relatively low valuations (2.8 times price to book) compared to the Nifty 500 broader market (4.4 times price to book). The metal index also offers more than 30 bps higher dividend yield at 1.38%. This presents an opportunity for investors to capitalise on growth potential. The rising demand for metals, coupled with favourable government policies, suggests a bright future for the sector.