Mayuresh Joshi, Head-Equity Research – India, William O Neil, says “as prices recover on the LME with China demand expected to come back in the next financial year, even the top-line growth in terms of realisations for a lot of ferrous players will continue to gain traction in the next year and a half as well. So domestic steel companies like JSW Steel can continue.
Who would have thought a steel company in the last 10 years would have given you a 9x return?
Domestic steel companies are still holding out. The expectations that are now coming off is that a large part of the capex is largely behind us. I think some part of the capex is going to get carried forward in this financial year and the first half of the next. But the bulk of that capex is probably behind us.
With the expansions that are probably happening at its respective plants and the backward integration operations thereof as well, we are probably going to see a better EBITDA number on an absolute basis than an EBITDA per tonne that JSW Steel is going to produce.
Again, it is largely a cyclical industry. We all know that. But a large element in terms of the infrastructure spending that is still expected to come through from the government side, will reflect in better numbers for at least these domestic steel companies, where a lot of consumption might happen on local sources. As prices recover on the LME with China demand expected to come back in the next financial year, even the top-line growth in terms of realisations for a lot of these ferrous players will continue to gain traction in the next year and a half as well. So yes, domestic steel companies like JSW Steel can continue.
Are there any stock or sector ideas that you are working with right now? From last month to now, we have at best just moved around in a 100-150 odd point band on the index. And even the small and midcap indexes have not done a whole lot on a month-to-date basis or rather on a one-month basis. What are your biases both within the largecaps and small and midcaps?
Cement and road construction companies will probably remain on our watch list. Within the large names, UltraTech is something that we continue to prefer at MarketSmith India. Large player, national presence, expectations in terms of carrying out the leverage capacities quite well. Again, I think not too much of that on its balance sheet as well. Within the same universe, in the midcap universe, Dalmia Bharat remains on our watch list. A decent set of numbers that the company posted and EBITDA/ton 955. The small company in the northeast, Star Cement, is also something that we like. They are expanding both their grinding and clinker capacity in the northeast. A zero debt company at the end of the day and expectations in terms of reasonable amount of volume and value growth should suffice strong earnings growth for players within the cement space.
A road construction company is also very interestingly placed. I think the acceleration in a lot of infrastructure projects and specifically road projects to be particular is expected to continue in the next few years. A few of the lesser leveraged companies, companies like K&R Construction, PNC Infratech stay on our buy watch list at MarketSmith India on two counts; the equity inflows into their existing EPC and HAM book is very minimal, and their existing cash flow should suffice for that.
On top of that, minimal or no negligible leverage onto their books means as improvement happens in terms of execution, and with better IRRs coming through, for most projects that they are executing, they will remain a key focal area in the next few quarters as far as earnings growth is concerned. So a few of these pockets look very interesting.