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.
The future is bright but... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 25, 2000

    The future is bright but...

    The old economy stocks seem to have fallen out of favour. Or so it seems. Consider this. In India, the estimated spending on infrastructure is likely to be Rs 7.6 trillion over the next twenty years. This money will be spent on building roads, bridges, ports, houses and what not. Despite this the money flow in stock markets is distinctly towards the new economy stocks, which are considered to be the new growth engines of the economy. (No doubting that.)

    But step back a moment and think. The new economy companies will also require infrastructure to operate in. And building infrastructure will require steel, cement… Infact India's per capita consumption of steel is 20 kilograms as against 80 kilograms in neighboring China and 925 kilograms in South Korea. This highlights the potential for growth in domestic steel demand over the coming years as per capita income rises and the economy gains pace.

    The domestic steel sector is likely to be a big beneficiary of this infrastructure-spending boom. And companies are eager to meet this demand. Indian steel companies benefit from domestic availability of raw materials (including iron ore) and cheap labour. However, despite these advantages India companies often lose out to foreign competition because of the latter's superior technology and larger volumes, which generate scale and size economies that are unparalleled by Indian companies. And this could prove to be a key area of concern in the future.

    In the years post the Southeast Asian crises (and till recently) global demand suffered considerably. The situation became worse after the Russian crises that contributed to the dramatic increase in surplus steel capacity globally. With large surpluses floating in the market, steel makers resorted to large scale dumping in markets like India. The results were disastrous for the targeted countries. The Indian government had to ultimately resort to import curbs (anti dumping duties) after steel prices declined sharply and the domestic companies started to post decline in profitability if not losses (led of course by the Steel Authority of India). In a sequel to these measures, the government went on impose floor prices on the import of various steel products.

    This recent crisis clearly highlighted the vulnerability of the domestic steel sector. Such events in the future could once again derail growth of the sector. Moreover, the government is bound by its commitments to the World Trade Organisation to bring down import barriers over the next few years. Then the use of tools (such as anti dumping duties) to protect the domestic steel companies would become subject to greater scrutiny.

    Meanwhile, the short-term outlook has once again started to look up. The domestic demand scenario has improved over the last one year (see graph). In recent months international prices too have spurted on the back of a rise in global demand. This has resulted in an improvement in the domestic price scenario. More importantly, this has contributed to the recovery in the steel sector by providing the domestic companies opportunity to export steel (an export led recovery).

    Although the near term picture looks rosy, hurdles in the form of anti dumping duties imposed by countries on imports from India could as yet nip the recovery in the bud. Already the United States, Canada and the European Union are considering or have imposed duties on imports of various steel products from India. A broadening of this measure to include other steel products could deal a deathblow to the domestic steel sector in the medium term.

    The other concern (and the main one) pertains to the government's commitment to step up spending on infrastructure. The need for infrastructure is felt by all. However, given the weak fiscal position, the government is unable to launch a massive public works program. At best this exercise has been regional, which has created further imbalances in the standard of living.

    Nevertheless the long-term scenario for the sector looks bright. The key to dominance in local markets would continue to depend on the willingness of the domestic companies to invest in new technology that will enhance productivity and reduce costs of production.



    Equitymaster requests your view! Post a comment on "The future is bright but...". 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...

    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


    Aug 18, 2017 (Close)