Exploring Stocks and Sectors – A Safari

I think we’ve talked about China enough, the turmoil its economy is going through, and the past rules that dig their own graves. It’s time that we start focusing on the domino effect that China is having on the global economy. Everyone is aware of the China-US Trade war. But today, let us keep it to its neighboring country which has had its fair share of ups but mostly down with China. I’m talking about our beloved India. And the sector in focus today is- Steel. 

Some facts before we begin:

• India aims to expand its steel production capacity to 300 million tonnes to seek a significant position in the global steel markets. 
• In April-July, China emerged as the second-biggest steel exporter to India, selling 0.6 million metric tons of the alloy, up 62% from the same period a year earlier.

Previously, we mentioned that China has recently reported deflation. Meaning, the demand in the economy has sunk. With a whole set of other issues like the real estate crisis, the government in China is decreasing interest rates to infuse demand. But the situation is getting worse, at least that is what the data states. Not only this, the government has also cut down mortgage rates and reduced the down payment for first and second-time home buyers. But the fear amongst people as seen from the data – youth unemployment, aged population, and negative income growth, the policy will take a long to show results.

Hence, in order to curtail the supply, China is importing cheap steel to countries like India. If we talk about steel prices, they have plummeted from highs of $1100 to $600 right now due to excess supply. 

While global steel production fell by 1% in the first five months of 2023, India’s production increased by 3.2% annually. We have stated again and again that India’s domestic consumption presents a different story altogether. The steel sector is directly related to construction, infrastructures, equipment, and automobiles: the sectors we have seen growth in. 

The Indian steel sector ranks second in steel production.

This is not me who is saying this. The statement is backed by data. 

Supporting Citation – Tata Steel’s Q1 FY24 Investor Presentation

• The key steel-consuming sectors have shown good growth. Infrastructure / Construction continued to improve while auto production was up 3% YoY during 1QFY24.

What is the Government doing?

• PLI Scheme- The government is working on PLI scheme 2.0, with a special focus on Import Substitution. The existing steel PLI scheme has been closed after receiving applications for only ₹2,300 crores of the budgeted ₹6,322 crore. The Ministry of Steel is advocating for the release of approximately ₹4,000 crore in unutilized funds from the current Production Linked Incentive (PLI) scheme for specialty steel. This is in an effort to introduce an enhanced version, termed PLI 2.0, targeting steel types employed in the manufacturing of defense gear and automobiles, as informed by two sources familiar with the matter.

• Levying duties- When the government notices that cheap imports into the country are hurting small domestic producers, it often puts import and export duties to protect their interests. In May 2021, during the COVID-19 pandemic, the government imposed an import duty on steel to control inflationary pressure. Recently, the steel ministry has also written to FM asking it to look at the possibility of levying customs duty on Chinese stainless steel shipments coming into India. As I write this newsletter, I see a notification pop up on my phone- “India clamps down on Chinese steel, enacts 5-year anti-dumping duty as import rises 62%”. Finally a sigh of relief. Such a duty will benefit the domestic stainless steel industry which has been badly hit by such imports and is facing low capacity utilization.

Let us now move to today’s “Stock of Steel”

Stock Specifics: Godawari Power and Ispat Ltd.

This week in stock stories, we are talking about Godawari Power and Ispat Ltd. that operates in the steel industry, with key assets including two captive iron ore mines, a pellet plant, and a captive power plant.

Let’s start with understanding the company:

• Godawari Power and Ispat Ltd., part of the HIRA group is a fully integrated steel company.
• Iron ore mining and Iron ore pellets are the two primary business activities.
• The plants of the company are located in reserve-rich areas of India in Chhattisgarh and Odisha.
• Its competitive edge stems from these captive resources and a focus on high-grade pellets.

Have a look at some data and numbers:

• The company reported its highest-ever sales revenues in FY23, driven by record iron ore pellet production and sales.
• Despite impressive sales, EBITDA and PAT margins saw substantial YoY declines in FY23 due to lower pellet realization.
• The company successfully managed its debt, becoming net-debt free, and generated substantial cash from operations.

The company has ongoing capex projects aimed at enhancing capacity and reducing power costs through solar initiatives. Godawari recorded positive numbers during the last quarter with EBITDA, EBITDA margins and PAT going up. Have a look at it here:

We have talked a lot about steel prices decreasing today but Iron ore prices slightly increased this year, while pellet prices, although volatile, are expected to remain stable. The industry overall is on a positive trajectory. 

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