Hi nkp
Steel sector outlook is pretty negative for the year 2006 going by the reports and also by facts and figures supplied,including china being net exporter, prices of steel hovering around JAN-05 level with some downside possiblity.
However the market is so overpriced going by FY06 earning estimates. Most of the stocks are quoting at average PE of 25 and above. There is every chance that the market will go to 88xx level.
What do you think of defensive investment in steel stocks as their prices are being hammered down with abysmally low PE of 3-5? Historically, steel stocks and commodity in general has low PE.
Particularly SAIL comes to my mind. It will be available at around its 52 week low prices or 47. Dividend declared last year was Rs. 3.3 per share i.e. it will give return of 6.6% tax free ...not a bad idea at all if one is certain thatsteel sector will not tank any further though It has underperformed so far.
The reason being :-
1. it is the largest stell maker in india and with merger os issco becomes integrated player and hence ore and coal price fuctuations may not have much impact on its bottomline.
2. It is the psu about which there is no talk of privatisation at present. But in a year or two it is going to happen and then it will be re-rated.
3.FM P. Chidambaram, well known as PC, has asked to declare higher dividend so that Government can bridge fiscal deficit to fall in the line of Fiscal Responsibility and Budget Management ACT 2003 which requires the Govt to reduce the fiscal deficit by 0.3 per cent of GDP each year, and the revenue deficit by 0.5 per cent each year, beginning with this financial year. If this is not achieved through higher tax revenues, the necessary adjustment has to be made by cutting expenditures.
4. Economy is still growing and infrastructure sector is set to increase pace. Without steel there can not be any infrastructure story.
5. If the ore prices continue to increase then Govt may impose export restrictions in FY06 which will reduce the domestic prices of ores and again help steel makers of which SAIL may be beneficiary. If there is less availability of ores china might be forced to reduce production or increase cost of steel to meet the additional expenditure.....??? I am though not too sure about it???... Hoevever there are reports that chinese govt has asked steel makers not to expand capacity and not allowing new steel plants. China is a huge importer of ore to feed its mammoth production capacity.
In view of the above I feel that whithin two years SAIL may be re-rated to give better returns.
However in the current scenario one has to have a heart of steel to go contrarian.
I would like to have your considered opinion as this sector is much neglected in this forum
Regards
Pankaj
Steel sector outlook is pretty negative for the year 2006 going by the reports and also by facts and figures supplied,including china being net exporter, prices of steel hovering around JAN-05 level with some downside possiblity.
However the market is so overpriced going by FY06 earning estimates. Most of the stocks are quoting at average PE of 25 and above. There is every chance that the market will go to 88xx level.
What do you think of defensive investment in steel stocks as their prices are being hammered down with abysmally low PE of 3-5? Historically, steel stocks and commodity in general has low PE.
Particularly SAIL comes to my mind. It will be available at around its 52 week low prices or 47. Dividend declared last year was Rs. 3.3 per share i.e. it will give return of 6.6% tax free ...not a bad idea at all if one is certain thatsteel sector will not tank any further though It has underperformed so far.
The reason being :-
1. it is the largest stell maker in india and with merger os issco becomes integrated player and hence ore and coal price fuctuations may not have much impact on its bottomline.
2. It is the psu about which there is no talk of privatisation at present. But in a year or two it is going to happen and then it will be re-rated.
3.FM P. Chidambaram, well known as PC, has asked to declare higher dividend so that Government can bridge fiscal deficit to fall in the line of Fiscal Responsibility and Budget Management ACT 2003 which requires the Govt to reduce the fiscal deficit by 0.3 per cent of GDP each year, and the revenue deficit by 0.5 per cent each year, beginning with this financial year. If this is not achieved through higher tax revenues, the necessary adjustment has to be made by cutting expenditures.
4. Economy is still growing and infrastructure sector is set to increase pace. Without steel there can not be any infrastructure story.
5. If the ore prices continue to increase then Govt may impose export restrictions in FY06 which will reduce the domestic prices of ores and again help steel makers of which SAIL may be beneficiary. If there is less availability of ores china might be forced to reduce production or increase cost of steel to meet the additional expenditure.....??? I am though not too sure about it???... Hoevever there are reports that chinese govt has asked steel makers not to expand capacity and not allowing new steel plants. China is a huge importer of ore to feed its mammoth production capacity.
In view of the above I feel that whithin two years SAIL may be re-rated to give better returns.
However in the current scenario one has to have a heart of steel to go contrarian.
I would like to have your considered opinion as this sector is much neglected in this forum
Regards
Pankaj
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