Steel: Tisco Vs Posco - Views on News from Equitymaster

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Steel: Tisco Vs Posco

Apr 3, 2003

The domestic steel sector has been in the news since the last one year owing to the spectacular performance shown by steel companies. Steel production and consumption worldwide have registered a 6% and 4% growth respectively. This growth was fuelled primarily by China whose consumption of finished steel increased by nearly 15% in 2002. The global turnaround in the steel sector also benefited the Indian steel sector immensely. While the domestic steel production registered a rise of almost 6% in 2002, consumption also grew at a similar pace. In this backdrop of huge growth, we try to compare two steel companies – Posco (Korea) and Tisco (India) and see how the two are placed in the sector.To begin with, Posco is the world’s second largest steel producer at 28 million tonnes (MT) of steel output (3% of total production). The company is based in Korea and contributed 62% of the total steel production (2002) in the country. The fact that the second largest steel producer in the world has such a small share in world production clearly indicates that the global steel sector is highly fragmented. This is one of the reasons why margins enjoyed by other commodities like aluminium and cement are higher as compared to steel producers. The advantage is that of a better bargaining power.

However, on comparing Tisco with the Korean major, it can be seen that the Indian company has a long way to go. Tisco’s steel output for the last 12 months stood at 4 MT and it contributes about 14% to the total domestic steel production. Currently, the company does not figure in the top 50 list of the global steel producers. But with capacity expected to touch 5 MT in the next 2-3 years, the company could make a place in the top 50. However, Tisco has the distinction of being one of the lowest cost steel producers in the world.

 PoscoTiscoTisco vs Posco
Production (MT)28.04.115%
Sales (MT)27.23.814%
Market Cap. (US$ bn)7.21.014%
Sales (US$ bn)12.12.117%
Operating margins (%)14.219.8 -
Net profit margins (%)7.77.7 -
Sales/employee (MT) 1,419 87 6%
ROE (%)9.723.7 -
Market Cap/Sales0.60.5 -
Price/Book Value0.81.6 -
Price/Earnings (x)7.76.5 -
Note: All figures for Posco are for the calendar year 2002
           All figures for Tisco are for the financial year 2003E

The table clearly indicates the sheer size of the Korean major on practically all parameters over that of Tisco. In terms of production, volume sales, market capitalization and value sales, Tisco is just about 15% of that of Posco. However, the operating margins of Tisco are a good 560 basis points higher than Posco, which helps the former to produce steel at the lowest costs in the world. The advantage, we believe, lies in Tisco’s access to raw material.

Another interesting fact to note here is the tonnes/employee figures. Posco has a workforce of about 19,000 who produce almost 28 MT of steel while Tisco’s workforce of 43,000 employees manages to produce only 4 MT of steel. The primary reason for the huge difference in output efficiency could be the fact that Posco is technologically advanced as compared to Tisco. However, realizing this fact, Tisco has also been modernizing its plants and reducing the workforce to increase efficiency. The company has managed to reduce its workforce by 33% in the last 4 years.

On the valuation front, Tisco is commanding a premium over its book value while Posco is trading at a discount to its book value. The huge premium for Tisco could be due to two reasons. One, the growth prospects are better going forward due to the company’s presence in the developing economy (higher exports in the long run is also a reality). Moreover, Tisco’s stock price has appreciated by about 36% in the last one year thus resulting in a higher price to book value ratio, as compared to Posco, which fell by 23%.

Going forward, Tisco still has a long way to go. But the company has already starting taking steps in order to achieve the same. Now, it only remains to be seen how fast the Indian steel major is able to move on its growth path.

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