Indian Iron and Steel- What Exports really means for India?

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 CompanySalesBorrowings More than 1 yearExport SalesImpact on Export SalesMargins ImpactRemarks on % export data
JSW Steel1264107086730% Approx37923            6,257.30As per Mgmt. Concall
Tata Steel2439597556115% Approx36593.85            5,554.95As per Annual Report of FY 2020-21 (Add Growth)
Godawari Power527746950% Approx2638.5               539.84As per Mgmt. Concall
Sarda Energy3914158137% Approx1448.18               334.53As per Concall
SAIL960032470210% Approx9600.3            1,520.69As per Annual Report of FY 2020-21 (Add Growth)
NMDC2602715512% Approx3123.24            1,113.12As per Annual Report of FY 2020-21 (Add Growth)
Total (Rs in Crores)50159017333591327.07         15,320.42

Lets analyse indian export of Iron and Steel in various countries:

Note:We have ignored other countries as the the amount of export is very negligible

Conclusion

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

In case you are interested in making a contribution to our writing, please do so in the following account:

Account Number: 00000037522669317

Account Holder Name:Rashi Maheshwari

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