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Time to sell? #steelstocks - YouTube
Channel: unknown
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hi everyone welcome to today's video so
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let me start today's video by telling
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you a very interesting one-minute
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macroeconomics related story so part one
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of the story is that going forward china
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is going to dump a lot of steel in india
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you might naturally ask me a question
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why is that going to happen simply
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because of the viewpoint that there is
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excess production capacity in china as
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of now for production of steel and their
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domestic demand of steel is not growing
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at a brisk pace so naturally india
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becomes one of the prominent steel
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dumping markets for them you might say
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that akshat you know what that
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politicians are going to save us they
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always save us they are very noble
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people the answer is unfortunately no
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you can take a look at the recent budget
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announcement and it was categorically
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stated that the anti-dumping duty for
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some of the chinese steel has been done
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away with and when it comes to big
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countries like us and china india cannot
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flex a lot of its muscle so this is the
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second key part now third and the most
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interesting part is that politicians
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right now seem to have given up in terms
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of steel production industry in india
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there was a recent announcement that was
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made that there is going to be a 15
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export duty on steel from india now as a
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result what happened was that all the
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majority of the steel players in india
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their stock stand quite considerably and
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here is a very quick snippet for you you
[81]
can go through it so the story for today
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that we are going to discuss is that is
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it the right time to buy steel oriented
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stocks or should you just do away with
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it and what is it that i'm doing i'm
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going to speak about two stocks that i'm
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actually selling i will also explain you
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the rationale for it when am i going to
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sell it i will also tell you that so let
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us first and foremost understand that
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how much steel stocks have fallen by and
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what is the reason for this prominent
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fall so if you take a look at nifty
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metals because nifty metals becomes a
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great proxy for us to understand how the
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entire steel industry is doing so if you
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take a look at the last two months you
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can categorically see that
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at the base it touched roughly 28
[117]
percent discount so nifty metals has
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fallen by 28 in the last two months
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itself this is a major fall yes there is
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a broad based market correction that is
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happening but with metal stock the
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correction has been almost 2x than that
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of nifty and this is a sign to worry
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there are three specific short-term
[133]
reasons as to why the steel stocks are
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tanking so the first key reason is that
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the coal prices in india right now are
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very high which leads to high cost of
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electricity and steel makers require a
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lot of electricity so therefore their
[145]
profit margins will substantially go
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down so therefore the steel stocks are
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falling the second key reason is that
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the inflation pressure on other
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industries is going up because of supply
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chain disruption because of the russia
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ukraine war and bunch of other different
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macro factors the inflation pressure on
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all the other major production based
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industry is going up steel is a major
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raw material when it comes to any
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industry beet housing construction heavy
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manufacturing etc etc so what the
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government is trying to do is that they
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are trying to limit the prices of
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different input materials especially
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steel and as a result they have
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increased the export duty of steel by 15
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so because of the combination of these
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three reasons all the major steel stocks
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are getting corrected quite heavily so
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to cut the long story short in order to
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save other industries steel industry has
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to suffer and that is the viewpoint that
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our government has unfortunately taken
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take a look at this particular chart you
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will be surprised to know that steel
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manufacturers were actually doing fairly
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well they were actually making profits
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many of them have brought down their
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borrowings many of them were being very
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effective in terms of expanding their
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operating profit margin many of them
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were exporting to high value countries
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and were preserving their profit margins
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and rather expanding their profit
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margins but unfortunately due to this 15
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export duty
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it's almost impossible for these steel
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manufacturers in india to be comparative
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at a world scale and start supplying
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that steel outside india so what is
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going to happen in india so it is fairly
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simple that the local supply is going to
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increase not only from indian steel
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manufacturers but also from the steel
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that is getting into india from outside
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and as a result the overall prices are
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going to come down for steel and steel
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manufacturers again go back to that same
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old situation where they are literally
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selling a commodity product and they are
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not making any major profit margins so
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now you might have a counter question
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that okay other industries also need
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support they need to keep their prices
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down they have also suffered a lot so
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why is it that you are favoring steel
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industry so much the reason is fairly
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simple that you are not letting the free
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markets work and to what extent can you
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intervene in every single industry
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because the long-term message that this
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gives out to a bunch of other players
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from outside india is that you know what
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indian government is very middlesom so
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they might think twice before making
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these large cap investments especially
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on these capital intensive industries
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like steel if you think about this
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entire situation rationally two things
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will stand out and these two things
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should worry you first and foremost the
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industry was in an upswing for example
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take a look at this chart it
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categorically points to the fact that
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india's demand for steel was going up
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when the world's demand was coming now
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so which is a great sign if indian steel
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manufacturers would have had a choice
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that you know what i am producing 100
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tons of steel i get an option to give it
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to indian consumers vis-a-vis consumers
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outside india wherever i am making
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profit so i would have benefited from
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this industry upswing the second key
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point and the more worrisome point is
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that for the last one and a half two
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years steel manufacturers or many of the
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steel manufacturers in india were making
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very good inroads and profits so let me
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take you to the example of tata steel
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and show you something very interesting
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there so first and foremost take a look
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at this balance sheet and what you would
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notice is the amount of borrowing so it
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was going up up until 2019 or in fact
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2020 and since 2021 they have been
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trying to bring their borrowings down
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because steel is a very infrastructure
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heavy industry it requires a lot of
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capital influx and a bunch of other
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capital moves so for such an industry it
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becomes very important for these large
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players to be cognizant of how they are
[350]
spending their capital and not do too
[352]
much work in terms of their debt so all
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the major steel producers in india were
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at least trying to bring down their debt
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they were trying to run their operations
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profitably and whatever money they were
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making they were trying to pay off the
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borrowings and reduce their borrowings
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that could have created such a positive
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impact on the entire steel sector but
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unfortunately now going forward due to
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this increase in 15 taxes it looks very
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unlikely that these steel producers will
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keep their profitability intact so you
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might say that okay in the short term
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the situation for steel producers does
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not look very positive but what about
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long term does the industry still have
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very strong growth prospects so let us
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take a very quick look at that so here
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is an excellent chart that comes from
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ibef it talks about that the demand for
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steel in india is going to grow up agree
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that's a very good sign there is
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increasing investment okay now after
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this move i don't know if this situation
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is going to stay intact policy support
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again this is highly debatable
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comparative advantage if we say again it
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is getting crushed even if you study the
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steel sector after this recent move the
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situation is actually very troublesome
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given the fact that capital everywhere
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is drying up across all industries a lot
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of countries are making dramatic moves
[419]
across their different industries and
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this can create a very negative
[423]
long-term impact but let us not discount
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this so soon let us look at the
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sicklicity of steel because if the world
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demand of steel goes up quite
[430]
considerably going forward then even the
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steel produced in india will still find
[434]
profitable customers outside india so if
[436]
you take a long term view on nifty
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metals what you will find is that metals
[440]
or commodities will have a fairly long
[442]
cycle for example here you can see that
[444]
from 2018 onwards all up till the point
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of 2020 for approximately two two and a
[449]
half years the steel sector was going
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down previously there was a two year
[453]
cycle when steel was going up now after
[456]
2020 the steel had been going up and now
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it has started to come down so one could
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argue that commodities slash metals
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slash steel is very cyclical in nature
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so whenever there is a rebound in the
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entire industry these stocks or steel
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stocks will again bounce back quite
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aggressively and i do not discount that
[472]
fact but predicting this market cycle is
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really really complex job even producers
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and consumers of steel that are
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investing billions and billions of
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dollars even they are not able to run
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this analysis properly now on top of
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this cyclicity point there is another
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good positive factor at play and take a
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look at this particular graphic what you
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would notice is that india is focusing a
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lot from a policy point of view in terms
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of running the pli scheme and steel
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forms a part of it approximately six and
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a half thousand crore rupee has been
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dedicated to steel industry and one
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could argue that again steel industry or
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steel stocks will benefit as this policy
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comes into effect so these are all
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positive points but before you jump into
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buying these stocks at a dip please
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understand the risk part of the equation
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as well so let me take you through a few
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key points here so first and foremost
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take a look at this particular chart and
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this is a very varying chart it shows
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the production capacity of different
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countries and how they have been
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increasing their production capacity
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over the last three years what you will
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notice is that the production capacity
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of china is almost 10 times that of
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india yes we could argue that you know
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as a country india is at number two
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because second is the european union
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which is not a country country per se so
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yes it looks great that okay in what
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that we are the second largest steel
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producers of the world but the
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difference between first and second is
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huge here now the second key thing that
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you will notice from this particular
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chart is that china has been increasing
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its production capacity while the world
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is bringing that production capacity
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down so what does this tell you about
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chinese intention it's very evident that
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if this excess steel does not get
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consumed within china what are they
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going to do with it they are going to
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dump it on someone so then comes the
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natural question where are they going to
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dump all this excess steel the answer
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unfortunately like india plus there are
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other countries but india becomes a
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major prominent market i will also
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explain it to you why but let us first
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study the viewpoint of raviopal who is
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the md and ceo of jindal steel so he
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says that as the supply of steel is much
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more than its economic demand the
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chinese have started to dump steel in
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overseas market the major export market
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apart from india are all these different
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countries so the point is that due to
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excess production capacity of steel and
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the lack of growth in terms of domestic
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consumption of steel china has to dump
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it on a country like india now some of
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you might ask me that akshat okay why is
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it that the chinese demand of steel will
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go down going forward in the future so
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here are a very quick snippet and then i
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will break this argument apart for you
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so you can clearly see that china's
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steel consumption will peak at 900
[615]
million tons before falling to 700
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million tons by 2035 this is as per cisa
[621]
report a natural question comes why will
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this phenomena play out so you would
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need to understand where steel gets
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consumed and there are three major
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sectors at play one is housing or
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construction approximately it is
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estimated that 15 percent of world steel
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gets consumed in chinese housing market
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itself so it is like crazy number the
[639]
second key industry where steel gets
[640]
consumed is heavy industry and china is
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moving away from heavy industry to
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slightly high end industries so the
[646]
demand in industry segment is going to
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come down third and final sector is the
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auto sector a lot of manufacturing of
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cars has moved out of china due to
[654]
competitive advantages in terms of labor
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and bunch of other different factors so
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again the speed of growth of demand
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compared to the production speed of
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steel in china those two are diverging
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can i show you some data around it so an
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easiest data a proxy point could be the
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urbanization so let us quickly compare
[671]
the urbanization study of china between
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1980 to 2021 to that in india so you can
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clearly see that urbanization in china
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used to be roughly 20 40 years back now
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it is at approximately 64 percent there
[684]
is hardly anything left to be urbanized
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so to say now why am i picking
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urbanization because urbanization simply
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says how people are moving from rural to
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urban
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which will lead to more buying of car
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more creation of houses more creation of
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heavy industries what not so to cut the
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long story short china is already
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peaking when it comes to urbanization so
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therefore the rate at which the steel is
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going to get consumed in china is going
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to go down so what about india you can
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clearly see that our rate of
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urbanization is still at approximately
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35 percent still a huge way to go and
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therefore government should be
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supporting steel producers bringing in
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more money for steel manufacturers in
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india trying to make it more efficient
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rather than putting like more and more
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export duties this is a very
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short-sighted policy move which will
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have a lot of negative repercussions so
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the word of the day today is
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repercussions let me know what does that
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mean so this will have a lot of negative
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repercussions on a series of industries
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which are trying to find their foot in
[737]
india now comes the final chart that i
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would want to show you because a natural
[741]
question here would be that can't india
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fight this anti-dumping war the short
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answer seems like a no and this chart
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will prove that theory because here you
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can see that our dependence on chinese
[751]
import has been growing over the years
[753]
so take a look at probably 2017 2018
[756]
2019 and 2020 data you will see that
[758]
this difference between blue and red
[760]
chart has been growing over time
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now when anti-dumping wars are fought
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between two nations be it india china
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india us china u.s it all comes down to
[770]
how much you are importing from that
[771]
country visa is exporting
[773]
if india can figure out other ways of
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importing the material it is importing
[777]
from china through other countries then
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yes india can definitely prepare better
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and fight that anti-dumping war but at
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least as of now that doesn't look to be
[785]
the case so with that viewpoint in mind
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there are two stocks that i will be
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selling i internally do not see any
[791]
issues with these companies therefore i
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had purchased it in the first go but
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looking at the policy level changes i am
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not bullish about these two companies
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anymore these are good businesses let me
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first and foremost tell you it is just
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that the policy situation in india
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doesn't seem to be favoring these two
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companies so therefore i'll be selling
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them will i be selling them right away
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the answer is no i'll be selling them at
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an appropriate time and i will let you
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know also but for the time being i have
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made up my mind that i'll be selling
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these two stocks so the first talk is
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nmdc i have been fairly bullish about
[819]
this company and i'm sitting on a profit
[821]
on nmdc stocks by the way if you do a
[823]
very quick fundamental analysis you will
[825]
see that the performance of the company
[827]
has been going up their profit margins
[829]
have been improving that the total sales
[831]
of the company has been going up their
[833]
net profits have also been increasing
[835]
but due to this sudden change in the
[837]
policy environment i don't see that this
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company is going to compete in the next
[841]
five years or so so therefore i don't
[843]
see any point in terms of holding this
[844]
company as of now is it a good company
[846]
yes it's a monopoly oriented company
[848]
it's a very good company i had done an
[850]
analysis of this company earlier
[852]
internally there seems to be no issues
[854]
in terms of steel manufacturers but due
[856]
to policy chains these companies are
[857]
going to suffer more then the second
[859]
stock that i'm going to sell these were
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the two steel oriented stocks that i had
[863]
in my portfolio i'll be selling off sale
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or steel authority of india limited as
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well again the same story there sales
[869]
have been growing profits have been
[870]
growing no internal issue seems to be
[872]
there with the company but policy moves
[874]
have literally rendered these businesses
[876]
incompetent and i don't see any reason
[878]
why these companies are going to do well
[880]
compared to their global peers i'll be
[882]
selling sale on a loss by the way so
[884]
what is the key lesson that i have
[885]
learnt in this so my learning is fairly
[887]
simple that hey do not invest in
[889]
businesses which look really good but
[891]
they are heavily supported by the
[892]
government if the government
[894]
intervention is really really high
[896]
tide can turn anytime on any good
[898]
company also so from now on i'll be very
[900]
very mindful in terms of investing in
[902]
companies where the government
[904]
intervention is higher than usual and
[906]
unfortunately steel or any other
[907]
commodity becomes one such business
[909]
thank you so much for watching this
[910]
video and i will see you tomorrow
[932]
you
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