steel stocks: steel stocks could start booming again from September. here’s why
Should mid-cap and small-cap investors be cautious now or with the larger market continuing to do well?
Obviously, this market is expensive. Overall, we know for sure that the July-August numbers won’t give you good news. We may be on the rambunctious side this time around.
How would you approach metals now? Is the best of rally behind us?
The best is far ahead of us. This is a typical spinning game on the market. Investing in commodities has given phenomenal returns over the past 3 months when Nifty Bank was sulking. Nifty Bank is now at the March 31 level. The same backlash will occur in steel. We know demand will decline in May and June as factories, particularly in autos and consumer durables, begin to shut down.
But in September, you will find that this sector will come back in favor. The advantage is that it is the cheapest sector on the market. You can talk about historical PEs and other historical trends, but what most analysts forget is that this is the first time these companies have come up with a very balanced balance sheet. They were borrowing and growing over the past 10 years. The market gives you the chance to start over.
Some metals stocks are trading at historic highs. How would you defend the Chinese factor and the valuation factor for an investor in metals stocks?
Let me choose the valuation factor first. Over the past 10 years, be it Jindal Steel, Jindal Steel & Power or SAIL, they were growing furiously. The increase in capacity of each of these companies was four to five times. They borrowed money and did not raise equity. Therefore, they were in a leveraged trap. Their track records have changed dramatically over the past 4 years. The context of the evaluation is therefore radically changing. Most analysts forget that their balance sheets have changed dramatically and the context for these assessments is lost. You have to look at the new paradigm. These companies will have almost zero debt in two years.
Regarding the China factor, most analysts are unaware that this (Indian) government has been very vocal and active in granting tariff protections. Where does the story of the steel recovery come from? It started with tariff protection a year and a half ago. It was the trigger, not the demand. World prices came later. The government implemented significant tariff protection when world prices were the worst. The real story from the field is that if there is no new supply and the economy can grow 4-5%, the money will be made by domestic companies. The second factor is that it is a recurring story like that of cement where 20 companies competed against each other 7 to 8 years ago. All of them have been over-indebted and are looking at the cement sector today. There are five companies with good balance sheets and huge profits. Steel went through the same thing.