On 22.05.2022, Indian Government increased exports duty on Export of Steel to 15% and for Iron ore the export duty has been increased to 50%. In case of Pellets the export duty has been increased to 45%.
Post Corona times all commodities have bull run which crazily increased the margins of these companies. Such windfall gains continued for more than 1 year and resulted in highest ever profits and deleverage of Books. But at times when windfall profits creates FOMO amongst retailers and analyst, the contrarian action side is always from Government. The Government imposed Anti-Dumping duty to support this industry long back when the financial numbers were bleeding and excess leverage was posing solvency risk for these companies. And now the government did exactly opposite.
In FY 2021-22, India’s total export was Rs 31,46,186.29 crore or $419.49 Billion dollar. Out of this total exports, iron and steel contributed 5.42% share i.e Rs 1,70,594 crore or 22.91 Billion dollar Exports.
Let’s analyse few leaders of this Industry:
|Fig. in Crores|
|Name of Company||Sales||Borrowings More than 1 year||Export Sales||Impact on Export Sales||Margins Impact||Remarks on % export data|
|JSW Steel||126410||70867||30% Approx||37923||6,257.30||As per Mgmt. Concall|
|Tata Steel||243959||75561||15% Approx||36593.85||5,554.95||As per Annual Report of FY 2020-21 (Add Growth)|
|Godawari Power||5277||469||50% Approx||2638.5||539.84||As per Mgmt. Concall|
|Sarda Energy||3914||1581||37% Approx||1448.18||334.53||As per Concall|
|SAIL||96003||24702||10% Approx||9600.3||1,520.69||As per Annual Report of FY 2020-21 (Add Growth)|
|NMDC||26027||155||12% Approx||3123.24||1,113.12||As per Annual Report of FY 2020-21 (Add Growth)|
|Total (Rs in Crores)||501590||173335||91327.07||15,320.42|
Lets analyse indian export of Iron and Steel in various countries:
It is interesting to note that India Exported 20% of total export of Steel to China in FY 2020-21 and the same came down to 6.15% of total exports in FY 2021-22. This gives a inference that how the worlds largest commodity consumer got trapped into recession and is ready to send the deflationary waves globally with its supply. The reason we have discussed already in our previous blogs of China. Further Inflation played a substantial role in increasing export value Iron and Steel.
But we need to remember that abnormal profits are not a sustainable story when it comes to regular course of business activity. That’s why commodity cycle is cyclical and downfall or upward movement is volatile.
The reason for fall in stock prices is not export duty but due to lack of export, the domestic market will be flooded with steel and iron ore which will further put downward pressure on prices and margins of these companies.
Further if we see internationally the prices are falling at a rapid pace. The chart of international prices of steel is telling that the picture is not rosy. So if the prices fall off further then these margins can be coverted into losses in future. Export Duty is not a big factor but filling the supply vacuum is a big factor for reduction in prices.
Best time to sell cyclical stock is when the PE is very low or in single digit and dividends are high.
By CA NIshant Maheshwari, Vishal Vora
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