Poll: Steel still king

"I think future leaders are resource-based companies like steel, oil and mining". These are the words of the renowned investment guru, Dr. Marc Faber in reply to the question posed to him as to who will lead the Indian stock markets going forward. The above is an excerpt of Dr. Faber's interview with Equitymaster.com on his recent visit to India.

The above statement tends to highlight the similarity existing between what Dr. Faber thinks and what the readers of Equitymaster believe i.e. steel is the commodity to be invested in at the current juncture. In a poll conducted on our website last week, wherein we asked our readers, "At the current juncture, which commodity sector looks attractive?" The result of the poll is indicated in the pie chart below.

Not to our surprise (unfortunately), steel sector continues to dominate the retail investor's buy list! A good 53% of the respondents believed that steel sector continues to remain attractive, which was followed by cement at 34% and the balance 13% favoured the aluminium sector.

We too believe that since steel sector has an important role to play in the development of any economy, the Indian steel story is not over yet as the infrastructure and housing story is yet to pan out fully. However, we have been cautious towards the sector owing to the steep valuations at which some steel stocks have been trading in recent times. These stocks have run up too soon on the bourses. Moreover, we believe that while the volume story for the steel sector will continue into FY05, it is the possibility of pricing pressure that is likely to creep up owing to rise in steel capacities during FY05. However, all said and done, for FY04, investors can expect good results for steel companies as steel prices have continued to sustain ground, and both, steel consumption and exports, have as yet shown no signs of weakening.

While the audience has voted for the steel sector, our vote would go for the cement sector (out of the three options here). With monsoons almost coming to an end, construction and infrastructure activities are likely to pick up and this would definitely give a boost to the cement consumption in the country, which in turn would help improve cement prices. Just to put things in perspective, cement prices remained higher by 3.8% during April-July 2003 (in the Mumbai market) and with production expected to rise, the industry prospects are looking good. It must be noted that with no fresh cement capacities likely to crop up in the near future, the demand-supply gap for the cement industry is likely to be on the narrower side, which in turn will keep a check on any fall in cement prices. In sum, FY04 will be a better year for the cement sector as compared to last year.

The third sector here is the aluminium sector. The prospects of the aluminium industry seem bright after a poor FY02 and an average FY03. While the demand for the metal is expected to show a steady growth of 3%-4% globally, on the domestic front, the prospects are even better with growth expected to be in the vicinity of 6%. The government's thrust on infrastructure in itself could emerge as a crucial growth driver in the long run. The power sector is the sector's largest consumer and it must be remembered that 'electricity for all' is one of the top priorities of the government. Passage of the Electricity Act 2003 is another positive for the sector as it encourages players to venture not only into generation of power, but also set up transmission and distribution facilities. Besides, economic recovery will aid demand from packaging and consumer durable sectors, and consequently fuel revenue growth. Thus, considering the fact that the per capita consumption of aluminum in India is very low and India is an emerging market, the longer-term demand outlook remains positive. We feel that FY04 will be a good year for the aluminum sector, especially for players with a strong presence in the alumina segment, which has seen prices double YoY.

While the investors may be overly optimistic over the prospects of the steel sector and unduly cautious over the aluminum sector, our advise to investors would be too look beyond FY04 and re-consider their investment options with a long-term horizon in mind. To conclude, this is what Dr. Marc Faber had to say when asked about the investment opportunities for investors, "They should be in...equities that have a large asset base. As I mentioned, I would be long on commodities, including............"