Despite NCLT cases, steels cos attracting global buyers

This interest to acquire steel companies isn't without a reason.

Steel industry has gone through a global turmoil. Most of these companies defaulted on their loans after their coal blocks were deallocated by Supreme Court when the global steel prices were lower than the cost of production.

Two years ago in Dec 2015, FOB China prices for Hot rolled coil (HRC) and plates were around 250-255$ per tonne. Today FOB China prices are around 575$. Steel prices have more than doubled since the time these steel companies became non-performing. The steel prices are likely to strengthen further on the back of continued shutdown of capacities & reduction in production by China and global growth recovery.

According to news reports, Managing Director of Tokyo Steel Manufacturing Co Kiyoshi Imamura has recently made a statement that hot rolled steel prices could approach 800$ per tonne this year.

The domestic demand for steel has also picked up quickly surprising all the steel manufacturers positively. Modi government's strong push for infrastructure and housing is helping steel companies increase their utilization. The demand outlook looks favourable for next few years. Moody's has in its recent report "Steel – Asia, 2018 outlook" stated that among major steel-producing Asian countries operating conditions will be the most supportive in India, because of robust domestic demand and protectionist measures, and despite an increase in raw material prices and new capacity. The New Steel Policy, 2017, envisages an increase in per capita consumption from the present 60 kg to 160 kg by 2030.

Improving global outlook, increasing steel prices and strong domestic demand is reflecting in the share prices of steel companies. Tata Steel share is trading at Rs 770 per share, more 3.5 times of its lows of 211 in 2016. Same is the case with JSW Steel, which has tripled from its lows of 2016 (after adjusting for stock split). Jindal Steel & Power Ltd share price has become more than 5 times of its lows of 2016.

Share prices of smaller steel companies have increased much more. For instance Prakash Industries is trading at 10 times of its lows of 2016, Godawari Power and Ispat at 12 times of its lows of 2016.

Almost all analysts have buy recommendations on most steel stocks. Some see it as a long term bull run for steel sector.

Even with multifold increase in share prices of steel companies in last 2 years, these companies are trading at modest multiples of 6-8 times EV/Ebitda.

These multiples are much lesser than trading multiples which cement , paint or tiles companies enjoy. Most cement companies are trading at 25-30 times forward PE multiple and 15-20 times EV/Ebitda. Paint and tile companies are trading at more than 40 times PE multiples.

With the improving global outlook on the steel prices, expected consolidation in the steel industry and strong local demand, many analysts expect steady expansion of trading multiples in the steel sector.

This essentially means that all the shares which have already increased multiple times, have potential to further increase a few times from the current prices in next couple of years.

Under such a bullish scenario for steel, it would be a mockery if these steel companies are sold with a deep haircut for the lenders. Where in the world have the companies been sold at a discount in a strong bull market and positive sector dynamics? If the existing promoters were to sell these companies, would they be selling these at a discount or a significant premium?

Lenders and Committee of Creditors (COC) should relook at their process of finding a buyer for these assets. This is a one time opportunity for many international players such as Arcelor Mittal, Posco and Nippon Steel to enter the most promising steel market in the world.

Arcelor Mittal and Posco have been wanting to enter Indian steel sector for more than a decade now. The opportunity should be marketed well instead of starting with talk of a haircut by lenders.

Handling these few initial cases well is very important as it is likely to set direction for resolution of 8 lakh crores of public money.