Category: Your Money

Falling Demand Impacts Profitability of Indian Steel Industry

The Indian steel industry is on a slow growth curve. Domestic demand for steel has fallen because of inflation and high interest rates. Low availability of raw materials, high cost, upheaval in the mining sector, state bans, and environmentalist pressures are creating more problems for steel producers. The Editorial March 2013 reveals that the growth rate of the Indian iron and steel industry fell from 11% in 2010 to 4.3% in 2011.

finished steel - india

India is the fourth largest producer of crude steel in the world today. It is also an importer of steel since 2007. It is projected that if the 12th Five Year Plan proposals are implemented as per schedule, India could grab second place by 2015-16. However, as the 12th Plan Period (2012-17) commences, the prospect does not look bright for domestic demand of steel though per capita consumption in India has increased from 36.6kg in 2005 to 51.7kg in 2010.

Challenges facing the Indian steel industry

There are many problems that are hurting the growth of the Indian steel industry:

  • Non-availability of iron ore: Iron ore is available in plenty in India but unregulated mining and large scale exports have raised concerns on the long-term availability of raw materials to address domestic demand. For the sake of sustainability, the Ministry is restricting exports and making efforts to preserve the non-renewable iron ore fields.
  • Non-availability of coking coal: Coking coal is largely imported as domestic availability of the resource is limited. Raw material security and price volatility are challenges. Non-coking coal used for sponge iron production is growing scarce; imports will create heavy cost burdens on the steel sector.
  • Inadequate infrastructure: Inadequate sintering and pelletisation facilities for steel as well as domestic technology to process low grade iron ore are significant challenges. Existing road, railway, port and power facilities are not good enough to support the 12th Plan working group’s optimistic projection of steel production doubling in the next 5 years.
  • Outdated technology and R&D: The performance of Indian steel plants is lagging because of low quality inputs, obsolete technology in treating resources, and insufficient R&D on alternate technologies to reduce wastes and cost, and address environmental concerns.
  • Cheap steel imports: Indian steel industry players are concerned about the cheap steel dumped into India by Japan and Korea, following the Free Trade Agreement and lower import duties. “India has spent over $5.5 billion of precious foreign exchange Iast year in importing steel which Indian steel mills are capable of producing,” says Dilip Oommen, CEO & MD, Essar Steel India Limited.

 Steel industry prospects

As per the 12th Five Year Plan, infrastructure will receive an investment of $1 million. If that happens, domestic demand, infrastructure and the economy will receive a boost. The Steel Ministry proposes to increase steel production to 60 million tonnes in the next 5 years with an investment of ₹2.5 crore. Therefore, the Ministry plans to review steel-related sectoral caps by banks and consider relaxation of norms on External Commercial Borrowings (ECBs).

The Steel Ministry also expects domestic steel demand to rise by 10.3% annually by the final year of the 12th Plan. World Steel Association, a leading global steel body, predicts steel consumption will increase by 5% in India in 2013.

steel demand - india

As of now, the steel industry is experiencing immense pressure on profit margins. Rising input costs have increased steel production outlay. At the same time, low demand has created over-capacity. JSW Steel reported ₹669 crore in losses (analysis) in the second quarter of this fiscal. Tata Steel also saw profits going down by 89% (analysis). Steel companies may have to look at export options to maintain profits but the global scenario is hardly more encouraging. To be sure, it’s a tough time for steel manufacturers.

 

[stockquote]JSWSTEEL[/stockquote] [stockquote]TATASTEEL[/stockquote]

Sunder’s List

Roundup: S&P -0.06%, Dow -0.23%, Nasdaq +0.12%, Gold $1,605.90, London -0.18%, Germany -1.15%, France -0.99%.

LIC rescues the government again, picking up more than 70% of SAIL’s open offer. Looks like our government has taken their slogan “why go anywhere else” to heart! (ET) [stockquote]SAIL[/stockquote] Besides, who in their right mind would buy something if they  knew it would collapse in value the very second they buy it?

Nomura has pegged India’s economic growth at one of the lowest at 5.6% next fiscal, saying there is no recovery in sight on the non- agricultural component of the economy. (ET)

Ericsson to Micromax: You have been Served! Ericsson has sued Micromax after Micromax refused to sign license agreements for several wireless technologies. Micromax is the 12th largest handset manufacturer in the world, selling in total around 1.3 million handsets a month in Asia, the Middle East and Brazil. (Reuters)

This is pretty cool: In order to prevent promoters from influencing stock prices through frivolous open offers, Sebi today said no offer can be withdrawn on the ground that it is not successful. (ET)

Is global oil demand falling? Citi: “The Substitution of Natural Gas for Oil Combined With Increasing Fuel Economy Means Oil Demand Is Approaching a Tipping Point” (FT)

energy demand

Good luck and have a nice weekend!

Analysis: JSWSTEEL – To Catch A Falling Knife?

The entire steel sector has taken it on the chin lately and JSW Steel [stockquote]JSWSTEEL[/stockquote] is no exception. After making a 52 week high close to Rs. 900 levels, the stock has seen a one-way hammering all the way down to Rs. 600 with its all time low of Rs. 566 in sight.

JSWSTEEL analysis chart

The question on everyone’s mind is when is the slide going to end? It is trading at a PE of ~6.8 while its most recent quarter EPS was 5.76. Also, JSW paid a dividend of Rs. 7.50/share last year and Rs. 12.25 before that. JSW was never a profit engine – historically, net profit and margins have not been that great.

JSW Steel Quarterly results

As you can see from the chart below, RSI at 20 is showing extremely oversold conditions. However MACD is not confirming RSI.

RSI and MACD of JSWSTEEL

Should you catch this falling knife? The answer is wait a while before you take the plunge. With a beta of 1.71, it is pretty volatile and given a choice between JSWSTEEL and TATASTEEL [stockquote]TATASTEEL[/stockquote], I will take Tata Steel for its global footprint and profitability any day. However, keep a close eye on JSW, a good bargain might just be around the corner as the stock races towards its 52 week lows.

There is no such thing as “Risk-Free”

People are afraid, very afraid. The most recent carnage in the stock-market notwithstanding, CNX 100 is back to where it was in September 2010, a very volatile 30 months.

CNX 100: March 2010 - 2013

The conversations I have been having recently typically ends with “I don’t want to take any risk right now, let me wait and watch.” And therein lies the rub – there is no such thing as “risk-free.” Not in life, not in investing. The total risk in this world is a constant – we only transform it by our action or in-action. So let me walk you through what I mean.

“I don’t want to invest in the stock-market right now.”

The most dangerous part of the statement is “right now.” It means that either you, or an Oracle sitting somewhere, can correctly predict the right time to enter and exit the market. Some people have spent their entire lives (and countless computer cycles) to divine market-timing. Ever heard of the Elliott wave principle? Its a beautifully complicated mathematician’s wet-dream come true. Read the Wikipedia article first and then read this Quora thread. Forget market-timing, your odds of dating Deepika Padukone is better.

“I don’t want to invest in stocks.”

I totally agree with you if you are older than 70 years. You have no business investing in stocks or bonds for that matter. Hopefully you have made the right financial decisions so far – focus on spending all that hard earned money on pampering your grand-kids and what not. For the rest of you: bonds, especially in a country like ours, is a bad idea. This is how the benchmark yield curve looks like:

Yield curve

You are basically lending at about 7.5% for 10 years while the historical annual inflation rate is 10%. So essentially you are paying the government 2.5% for the privilege of taking your money. Want to take a walk down the credit-curve? There are NCDs that pay 12% you say? After all, aren’t they called “company fixed deposits?” You should really direct these questions to the holders of Deccan Chronicle, HDIL and Hubtown NCDs (these are the most recent examples of NCDs under default). So NCDs are not all that “risk-free” are they? Remember: the rate differential is meant to compensate you for the risk that you are taking. See how risk got transformed from inflation-risk to credit-risk?

“Can you guarantee that I will not lose money?”

Will anybody write you insurance without a premium? Of course there are ways in which principal can be protected, but that protection will come at a cost. For example, Birla Sun Life has a ULIP that guarantees that you will always buy low and sell high – after taking 10% in fees, every year.

“I will only invest in gold”

The most important thing before “investing” in gold is to know that the price of gold is governed only by the laws of supply and demand, like any other commodity. Sure, the last few years have been kind to the yellow metal – mostly driven by the “fear trade.” But the world is still turning and the sky has not fallen on our heads. Gold is already a major part of assets on Indian household balance-sheets, why double-down especially when the macro thesis is no longer valid?

“I will not invest in anything”

Yup, there was a time, back in 2008, when some nut-jobs withdrew all their money from the bank and kept it under their mattresses. But we are in 2013 now. Inflation has clocked over 10% year-over-year-over-year. Not doing anything is costing you money.

So what should you do? First, understand that there is no such thing as “risk-free.” As long as you are breathing, you will be taking risks – either actively or passively. Knowing what kind of risk you are willing to take is the first step towards coming up with an investment strategy. Once you have an investment strategy in place, draw up a risk-management strategy and stick to it.

And, most importantly, have a look at some of our investment themes – we can help you craft your investment and risk-management strategy. Give us a call!

Analysis: COLPAL

Colgate-Palmolive [stockquote]COLPAL[/stockquote] investors have had a tough 2013. After hitting an all-time high of Rs. 1580, the stock has slid to Rs. 1250 levels – a whopping 21% drop. Investors have been worried about falling sales in spite of holding prices steady and the imminent entry of P&G into the oral-care market. That said, Colgate holds over 54% of the toothpaste market and has been busy expanding its distribution and marketing into rural areas where per capita consumption of toothpaste is half that of urban areas.

COLPAL Technical Chart

We were a short-term buy back in February. However, the technicals this time are giving mixed signals. Our 4-9-18 model has been flipping between buy and sell all of this month and Aroon is stuck in neutral. However, RSI levels seem to be headed toward over-sold levels, suggesting a bounce from support at Rs. 1250 levels is possible.

The stock does pay a fair amount of dividend – Rs. 8/share was recently announced and given that its in the FMCG space, it is more-or-less recession proof. An extremely low beta of 0.16 provides a certain measure of comfort during volatile times.

COLPAL quarterly results

We would be buyer’s if the stock can hold on to its Rs. 1250 support levels over the next few days. Otherwise the next support is around Rs. 1200. This is a good stock to own for long-term buy-and-hold investors at these levels.