X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Steel: Good! But, what next? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Feb 9, 2005

    Steel: Good! But, what next?

    Introduction
    One sector that continues to hog the limelight on the bourses is steel, which is vindicated from the fact that most of the steel stocks have outperformed the benchmark indices by a wide margin over the last couple of years. However, much of the gains in steel stocks were witnessed during FY04 and if one considers the last 12 months' performance, the outperformance has been relatively lower. The trigger for the continued momentum in steel stocks has been the strength in the steel cycle, which has managed to sustain right through FY05 (contrary to our expectations of peaking in 1HFY05) and if the recent developments in the sector are to be considered, the near-term momentum is likely to hold. In this backdrop, we take a look at the 9mFY05 consolidated performance of some steel companies listed on the bourses and see what is in store for the sector going forward.

    9mFY04 9mFY05 Change
    Net Sales 278,543 389,537 39.8%
    Expenditure 215,777 253,229 17.4%
    Operating Profit (EBDITA) 62,767 136,308 117.2%
    EBITDA margin (%) 22.5% 35.0%
    Other income 2,274 3,583 57.6%
    Interest 14,567 15,217 4.5%
    Depreciation 17,542 19,324 10.2%
    Profit before tax 32,931 105,350 219.9%
    Extraordinary items (842) (2,499)
    Tax 6,138 31,387 411.4%
    Profit after Tax/(Loss) 25,951 71,463 175.4%
    Net profit margin (%) 9.3% 18.3%

    * Includes Tisco, SAIL, Essar Steel and Ispat

    Industry background
    India, with its 34 million tonnes per annum (MTPA) total steel producing capacity, is the world's 8th largest steel producer in the world. However, India's per capita consumption of steel is at around 30 kgs as against over 200 kgs in China and an average of 450 kgs in developed nations. This indicates tremendous growth potential considering the low consumption of steel in the country.

    What has driven performance in 9mFY05?
    China aids the growth: As can be seen in the table above, the consolidated topline of the 4 companies has registered a YoY growth of 40% during 9mFY05. It must be noted that this growth is primarily a factor of strengthening steel prices. Average steel prices during the period under consideration were higher by 33% as compared to the same period last year.

    Sustained demand for the metal from China, which consumes about 25% of world steel, is the big pillar that has supported the steel cycle as yet. With the Chinese economy growing at over 9%, huge investments are being made in infrastructure and housing related activities. Further, with the US and the EU economies also having shown signs of strength, steel prices in those regions have also firmed up. On the domestic front too, high activity on the housing and infrastructure fronts (thanks to the government's housing tax breaks and road development programmes), has kept steel prices ticking. The demand-supply scenario continues to remain favourable currently.

    High realisations and cost management aid margins: On the back of a sharp improvement in realisations, the consolidated operating margin of steel majors has improved from 22.5% in 9mFY04 to 35% in 9mFY05. While much of this surge in margins is on the back of sharp improvement in steel prices, it would be inappropriate to take away the credit from steel players for managing their costs in a more efficient manner and the productivity improvement put in place by them.

    It all flows to the bottomline: All of the above factors have consequently led to the consolidated net profits of the steel pack under consideration grow by 175% YoY. However, apart from the operational improvements, interest costs, which have played an important part in determining the bottomline growth of steel companies, continued to lend a supporting hand to the industry, thanks to the soft interest rates prevailing since the last few years. Steel is a highly leveraged industry. Thus, lower interest rates helped steel companies to re-shuffle their high cost debts with lower interest bearing debt. The cyclical upturn in the industry, which in turn improved cash flows, also helped companies to pare their debts significantly. Further, assistance from financial institutions and the government in terms of debt restructuring had come as a boon for the industry, which accelerated their turnaround and helped them come out of the trough. This, combined with strong volume sales and even stronger realisations aided the industry reap fortunes.

    What to expect?
    Going forward, while the demand scenario looks encouraging with China's efforts having failed (as yet) to reign in its economic growth and increased consumption in regions like US, EU and Russia, it is concerns on the supply front that could take toll on steel prices. With most steel majors having already announced their capacity expansion plans, the increased supply in the medium-term could pose a serious threat to the sustainability of steel prices at the current levels.

    Further, China continues to remain one of the key determinants of how the performance of the sector would pan out over the next couple of years, as any shortfall in demand/imports from the country would lead to increased availability of steel for the international markets. This belief is further strengthened by the fact that as per reports, China was a net steel exporter in the closing months of 2004 as it increasingly meets its metal demand internally. Also, with prices of inputs like iron ore (up around 150% YoY), coal (up around 200% YoY), coke (up around 125% YoY) and scrap (up around 230% YoY) having skyrocketed, it is largely the vertically integrated players like Tisco and SAIL that would remain insulated to a certain extent and not the entire sector. Thus, over the medium-term, we would advise caution to investors considering the risk profile of the sector at the current juncture. There is a need to separate the wheat from the chaff!

     

     

    Equitymaster requests your view! Post a comment on "Steel: Good! But, what next?". Click here!

      
     

    More Views on News

    Tata Steel: A Strong Quarter (Quarterly Results Update - Detailed)

    Aug 12, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Loss at EBITDA Level Due to Higher Raw Material Cost (Quarterly Results Update - Detailed)

    Jun 12, 2017

    The company registered a negative EBITDA of Rs 2.64 billion during the quarter. This is on the back of an increase in raw material prices.

    Tata Steel: Strong Quarterly Performance (Quarterly Results Update - Detailed)

    May 22, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Pressure Continues. Loss at Operating Levels... (Quarterly Results Update - Detailed)

    Feb 15, 2017

    SAIL has reported a 26.2% YoY increase in the topline while the bottomline reported a loss of Rs 7.94 billion.

    Tata Steel: Loss from Discontinued Business Mars Performance (Quarterly Results Update - Detailed)

    Sep 27, 2016

    Tata Steel has reported a 6.3% decline in the topline while the bottomline was in red in 1QFY17.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE METAL


    Aug 18, 2017 11:23 AM

    S&P BSE METAL 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS