Talk of alliances with sector biggies fires up small steel stocks

 Dec, 2007, 0048 hrs IST,Rajesh Unnikrishnan & Nevin John, TNN
MUMBAI: Spurred by rumours of proposed alliances and tie-ups with domestic steel giants, mid- and small-sized steel stocks have been witnessing a sharp run-up on the bourses.

Share prices of steel and speciality steel makers such as Surana Industries, Bellary Steel, Bihar Tubes, Carnation Industries, Southern Ispat and KIC Metaliks have shot up by an average 30% over the past two months. The reason — their proposed alliances with domestic majors (Tata Steel, JSW Steel, Essar Steel, etc) for supply of raw materials and logistics support. Also, increasing consumption and demand for steel and better price realisation have added to the positive sentiment in these counters.

The stock price of Carnation appreciated by over 90% to Rs 63.10 on Wednesday from Rs 33.10 around two months ago on rumours that JSW Steel is negotiating for an equity alliance. Similarly, Bihar Tube shares surged 35% over the past two months to close at Rs 188.35 on Wednesday on rumours that Tata Steel is entering into an alliance with it. The Chennai-based Surana's stock price moved up 24% to close at Rs 218.35 on market buzz that the company is forming a joint venture with a Malaysian firm. Essar Steel is also said to be looking to enter into an alliance with Surana.

Bellary Steel, a minnow in the industry, saw its shares spurt 25% to close at Rs 5.67 during the same time frame on talk that a leading Mumbai-based industrialist may pick up a stake in the company. KIC Metaliks is up 16% to Rs 73.80 as the company is believed to be in talks with Tata Steel. Kerala-based Southern Ispat is also said to be in talks with Tata Steel for raw material sourcing, which catapulted the stock price upwards of 55% to Rs 16.85 in two months.

MF Global's Jignesh Kamani said , "Most of these small companies have raw material linkages and licenses for mining at various places, which is attracting bigger companies. For getting clearance for mining, companies have to wait for at least 2-3 years. These additional efforts can be avoided through an alliance."

When contacted by ET, a Tata Steel official said, the company is evaluating various options to ensure continuous supply of raw materials and strong logistics support. Tata Steel had recently signed a joint venture (JV) with Australia's Riversdale Mining to set up a special purpose vehicle to develop a hard coking and thermal-coal project. For sourcing limestone, Tata Iron and Steel Company had formed a JV with Thailand-based Unistretch, said the official.

The steel sector is expecting a Rs 50,000-crore investment from steel majors over the next four years. It includes both organic and inorganic growth plans in the domestic as well as international circuits. Other factors aiding the bullish trend in these counters are spiralling domestic steel prices and growing demand. The domestic demand is rising at over 10% annually while the global demand is increasing at 6%.