steel stocks-Melting under pressure
|Rs crore||Trailing 12 months ended March 2008||CMP (Rs)||M-Cap|
|Net Sales||% ch||Net Profit||% ch||Op. profit||% ch||OPM% (08)||OPM% (07)||PE (x)|
|Standalone financials for the trailing 12 months, *December 2007 ended|
The domestic steel demand is growing at over 11-12 per cent, whereas the supply is lagging at about five per cent. As major expansion plans are expected to go on-stream from financial year 2009-10, except for the 1.8 million tonne expansion of Tata Steel (expected by June 2008) and 3 million tonne expansion of JSW Steel (expected by September 2008), the supply of steel is expected to remain tight.
Fundamentally, the Indian steel industry holds its grounds in the long-term on the back of huge investments lined up in infrastructure ($500 billion during the Eleventh Five Year Plan). However, in the near-term, risk arises from the policy intervention and the inability of companies to pass on the increase in raw material prices.
These developments can adversely affect the prospects of the sector and may have long-term implications, thus increasing risk for investors looking to invest in these companiesthe sad state of oil marketing companies sends shivers down the spine.
These developments also remind of past instances pertaining to the sugar and cement sectors, where share prices of many companies are still trading at low levels.
There is a positive side, too. "Whenever the government intervenes in a particular sector, especially the cyclical industries, the attractiveness of the sectors dips, and hence, the market discounts the prices. However, long-term investors can use these uncertain times for picking good companies at lower valuations of about 6-7 times historical earnings," says Raamdeo Agrawal, joint managing director of Motilal Oswal Securities.
While there is risk in investing in these companies, which are surrounded by uncertainty in the sector, investors with a long-term perspective can pick up companies which are highly integrated and have exposure to the overseas market.
"I think short-term investors should keep away from these sectors (where political risk exists), and only long term investors, who can stay invested to take the advantage of change in the policies, should invest," says I V Subramaniam, director and CIO, Quantum Advisory.
In order to minimise the risk while investing in the steel sector, analysts recommend companies that are well integrated and have access to captive resources.
Tata Steel is one such player, which is considered to be less susceptible to the rising raw material prices (due to ITS backward integration) and may take the advantage of the increasing steel prices globally as 75 per cent of its total capacity (including that of Corus) is located outside India.
In the light of these developments, analysts believe that at least the next two quarters will be difficult for most steel companies.
However, things can change dramatically if positive development takes place in the form of government policy (roll-back of export duty or roll-back of input prices by government owned companies), or if raw material prices (globally) stabilise or decline.
Until then, the uncertainty will prevail and investing in steel stocks will mean a high-risk and low-reward proposition.