steel stocks: Most steel stocks would run up another 15- 20%: Nischal Maheshwari
What you are expecting from metals now? Is record high EBITDA going to continue for steel companies and more importantly is all the positive in the price or are steel stocks good to go for more?
Steel is in an extended bull run. The rally has been pretty strong and we continue to believe that there is more to go. If I look at any fundamentals as far as steel is concerned, be it in terms of landed prices, export prices or international prices, there is a fairly large gap. On top of it, they have been able to pass on the cost increases because there has been a fairly good demand as far as the consumption is concerned.
In our estimates, even if we have taken around a price of Rs 8,000-9,000 per tonne on the HR lower next year, still we are saying there is going to be a very strong growth — almost 25-30% across the numbers next year. This quarter is going to be outstanding. All the steel companies have two or three things in common. Their balance sheets are becoming very light. Most of them have been able to repay the debt.
Valuation-wise, they are still lower than their five-year peaks. Most of them are still available at 4.5 to 5 times EV to EBITDA and the peaks are around 6-7 times for various companies. We believe there would be another 15- 20% run up for most steel companies.
What is your take on the capital goods sector? Do you think that we can pencil in pretty steady revenue growth this time around and despite the commodity price rise, margins will continue to improve on the back of under recovery of costs on a yearly basis?
I would divide the capital goods sector into two parts; one is power and ex of power — largely industrials. I do not see much growth as far a power is concerned and I do not see large power projects being announced. Whatever is being done basically is largely replacement. There is a huge overcapacity in the turbine area and I do not see any improvement out there.
On the industrial front, our interaction with most of the corporates is showing that there is good demand. The implementation of the PLI schemes which the government has announced is going to take a bit of time. But having said that, most of the people have a good order book and largely from food processing, sugar. These are some of the sectors which are giving good orders at the moment.
Cement is also contributing there but the larger PLIs which we have seen especially on the consumer goods, pharma front, are yet to show up in their order books. Chemicals is definitely showing up but that has been there for some time now.
On the margin front, mostly their contracts are pass throughs. So I do not see any issue about the margins. We see improvement on the working capital side for most of the capital goods companies. Given that the order books are good, they were able to negotiate better terms with the buyers. There is going to be improvement in balance-sheets, profitability and all-round improvement in capital goods companies.
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