The Hindu Business Line : Steeling the thunder

After a slow and steady rise through most of the first four months of this year, the bull-run in steel stocks has permeated into the second and third rung stocks, too, within the industry. July and August have witnessed the biggest increases in prices of steel stocks, with many of them recording all-time highs.

In terms of performance, the just-ended fiscal and the first quarter of 2003-04 have been most beneficial for Tata Steel, the country's most profitable steelmaker. Fresh from a spate of cost restructuring, the company managed to make the best use of the prevailing buoyancy in steel prices to increase its bottomline nearly five-fold.

Only about 30 per cent of the net profit made during 2002-03 was directly attributable to costs and production efficiencies. The remaining 70 per cent of the profit after tax was as a result of the run up in steel prices right through the just-ended fiscal.

Tata Steel's Managing Director, Mr B. Muthuraman, has said that the company had made a net profit of Rs 205 crore in 2001-02 and that if the prices in 2002-03 had been exactly the same as they were in the year 2001-02, the company's profits would have been only about Rs 400 crore. Tata Steel's net profit in 2002-03 was Rs 1,012 crore.

So the moot point is whether the company's growth and performance can be sustained during the current fiscal and beyond. Last year, besides better price realisations, the company reaped the benefit of its cost rationalisation exercise.

The lowering of its wage bill, after its employee separation scheme, the divestment and sale of non-core activities and the reining in of material costs helped the company get closer to its goal of being EVA (economic value added) positive.

During the first quarter of this fiscal, Tata Steel recorded a four-fold increase in profit after tax at Rs 267.07 crore. The per share earnings was up from Rs 1.74 during the corresponding quarter of last year to Rs 7.24 (not annualised). However, the increase seems even more dramatic only because the benefit of the steel price rise had not begun reflecting in the company's books by the first quarter of 2002-03.

At the current market price of about Rs 253, Tata Steel is trading at a price to earnings of about nine times, be it whether the latest full year or annualised per share earnings are considered.

The stock is down from its 52-week high of Rs 265.5. Upside potential from this level may be limited. Shareholders can trim their exposures, while continuing to retain the share in their portfolios.

For the other integrated steel manufacturers which continued to make losses in 2002-03, the sustained steel price levels into the current fiscal and the next, could potentially help them turnaround.

Already there are indicators towards this. The good price realisations are abetting a reduction in the losses of the companies, some of which were neck deep in losses only two years back. Others, such as Steel Authority of India, are close to posting a full-fledged turnaround. And those in the integrated and secondary steel manufacturing sectors, which have strengthened their reach in the domestic and export markets, are also anticipating a run up in operating profits during this year.

As a result, second rung integrated manufacturers such as Essar Steel, Jindal Vijayanagar Steel and Jindal Iron and Steel are all likely to post better performances this year.

However, during the past few months, most of these steel company stocks and many in the rerolling and downstream products segments have witnessed a sharp run up in prices. Many of these stocks continue to linger around the high price levels that the steel rally led to.

Shareholders can consider exiting these stocks at the current levels. However, given the strong possibility of a revival of the industry's fortunes and the stabilisation of steel prices later this year, investors can re-enter selectively at lower price levels.

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