Monday, November 9, 2009

Steel Sector – Results Update


The recent recovery in industrial growth and in the real estate sector augurs well for Indian steel makers and the resultant rise in demand is already evident. India and China are two markets where steel units are operating at quite high levels of capacity utilization; 86% for China and 80% for India, compared with the world average of 64%.

The four major steel companies came with their Q2FY10 results in October 2009. Tata Steel Ltd., India’s biggest producer, reported a nearly 50.0% slide in profit and state-run Steel Authority of India Ltd. posted a 17.0% decline in net income last quarter. Net profit of Jindal Steel &Power Ltd. And JSW Steel Ltd. improved by 7.5% and 42.2%, respectively

Most companies benefited by selling more of their products as demand picked up because of the stimulus package and lower raw material prices but it did not translate into higher revenues and profits due to poor prices

Indian steel prices fell almost 35.0% from a year earlier, trimming earnings at local steelmakers.

Steel exports during the period declined by 40% to 0.93 million tonne as the global economy continues falters

The steel companies have reduced the price of flat steel products on account of global weakening of prices and appreciation of the rupee, as well as a dip in Chinese domestic prices

The margins have also contracted mainly on account of lower realizations and higher raw material prices

I believe that the Steel Stocks have gone way above their fundamentals and most of the demand recovery and other such factors are already factored into their prices. Thus entering them at the current levels would be taking on significantly higher risk and so one should wait for at least 2 more quarters to see whether or not fundamentals improve and then enter

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