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: Managing price cuts? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 24, 2004

    Steel: Managing price cuts?

    Steel stocks had been on a rampage across the global markets during 2003, beating not just the benchmark indices but also outperforming practically every other existent sector. The scenario on the Indian bourses, of course, was no different, as the rise in steel stocks was not just registered in percentage terms (%) but more so in the number of times (x times). However, after staying in the news during the last 6-8 quarters for positive reasons like regular hike in steel prices and exponential growth in profits for steel companies, the recent headlines have been more in terms of setbacks for the steel industry.

    In the last couple of years, strong demand and stronger realisations have helped steel companies improve their financial condition considerably. Dedicated efforts at improving operational performance (see chart above) has strengthened cash flows and earnings, which has helped these companies retire and restructure much of their debt, further augmenting their bottomline growth. However, while steel companies were raking in the moolah, there was a concern building up on the other side, that of inflation. It must be noted that manufacturing (which includes base metals like steel) forms the most important component of our inflation index by virtue of its highest weightage.

    While the entire blame of the current near 8% inflation cannot be put on the manufacturing sector, as oil prices have also had their share (not to forget the third component, primary articles), the fact remains that commodity prices 'have contributed' in pushing up inflation. This had prompted the government representatives to come out in the open, just a fortnight ago, partially blaming the rising commodity prices for aiding higher inflation. And presto, we had India's largest private sector steel company announcing a Rs 2,000 per tonne reduction in steel prices, forcing others to follow suit.

    While it may be premature to say whether this move by steel companies is a factor of some pressure behind government's closed doors, it is also difficult to completely rule out this possibility. It somehow does not seem logical that in times when global steel prices are ruling comfortably above the Rs 30,000 per tonne mark, Indian steel players are happy with a reduction in prices. Further, this move by Indian steel players has come despite the two major global steel producers, Arcelor and Posco, intending another hike in prices with effect from September onwards, which would only fuel a spate of hikes across the globe. However, with Tisco already making an announcement of refraining from announcing any price hike till March 2005, one can be sure that none of the domestic steel players would be in a position to rake in the additional benefits, even if the buoyancy in steel prices continues well into the second half of FY05.

    It must be noted that this is not the first time that the government has intervened, keeping a tab on steel prices. Earlier, in order to keep a check on rising steel prices and to entertain the request of downstream producers, who had claimed that higher steel prices were the result of a shortage of the base metal in the country owing to higher exports by steel manufacturers, the government had withdrawn all export benefits available to steel producers under the duty entitlement pass-book (DEPB) scheme. However, this was restored in the Budget last month.

    Apart from the above, there were other measures taken by the government in the form of restricting domestic steel producers from raising prices at regular intervals, which coincidently coincided with the general elections! The steel producers gave effect to a hike only post June 2004. Further, consistent reduction in peak customs duties and duties on various steel products was also aimed at curtailing the rise in domestic steel prices and also reducing the buffer for raising steel prices.

    Sensex vs steel stocks…
      2003 gains 2004 losses*
    Sensex 73% -14%
    TISCO 193% -26%
    SAIL 399% -27%
    Essar Steel 171% 0%
    Jindal Iron & Steel 390% -17%
    Ispat Industries 174% -37%
    *Till August 23, 2004

    Considering that all of the above measures are/have been setbacks for the domestic steel sector, it comes as no surprise that the markets have reacted negatively towards steel stocks on these news flows during 2004 (see table above). However, akin to every sector, there are stocks within the sector that are better placed to face the shock of decreasing realisations and at worst, a cyclical downturn. And in our view, we feel that Tisco is relatively the best placed in such a scenario.

    There are various reasons to support this view. The biggest advantage for Tisco is its backward integration in the form of iron ore mines and meeting more than 50% of its coke requirements internally. Further, unlike most other players in the industry, Tisco's sales are largely bound by medium to long-term contracts with only about 15%-20% sales in the spot markets compared to 40%-50% for other players. This would delay the adverse impact of the reduced prices, as these would come into effect only in phases as and when the contract comes up for renewals.

    Further, as has been seen in the chart above, Tisco's operating margins at 44% are the highest among its peers, which, apart from strong realisations, is an effect of improved raw material consumption and higher employee efficiencies over the years. This is advantageous for the company, as it would be able to protect a sharp fall in its margins even during a downturn. Apart from this, though we reckon that such high levels of margins cannot be sustained, in order to protect its margins as much as possible, Tisco is constantly improving its product mix by targeting growth in the value added and branded segments. These products tend to garner better realisations for the company apart from creating a loyal user base for its products. Thus, all in all, Tisco remains the best performer in the sector.

    To conclude however, while we accept the fact that the steel cycle has extended beyond our expectation and we believe that in the near term the buoyancy in prices is likely to sustain, we continue to remain apprehensive about the medium term growth prospects of the sector as a whole. At the current juncture, the risk-return ratio in the sector is against the investor.

     

     

    Equitymaster requests your view! Post a comment on "Steel: Managing price cuts?". 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 (Close)

    S&P BSE METAL 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS