Steel cos beat IT firms in profit growth

Major steel companies have shown stronger growth in profit after tax compared to major technology companies but the brick and mortar giants have under performed compared to tech companies in the stock markets.

Major steel companies like SAIL, Tata Steel and Jindal Vijayanagar Steel, have witnessed PAT growth ranging between 23.39 per cent and a huge 178.29 per cent for the quarter ended March 2005.

In comparison, major technology companies like Satyam, Infosys and Wipro recorded quarterly PAT increases ranging between 33.59 per cent and 65.88 per cent.

However, in terms of stock market performance it is an altogether different story with investors not gaining as much in steel stocks as they did on technology stocks.

IT companies showed changes in value between January 3, 2005 and May 30, 2005 of between 9.22 per cent and 7.64 per cent while steel companies showed only decline and by a larger quantum of between 27.97 per cent and 6.82 per cent.

Steel being a commodity, is subject to cycles and hence enjoys lower valuations in stock markets than do IT companies.  PAT growth for steel companies has been strong because of an exploding commodities cycle worldwide and strong demand from China. 

In March 2005, world steel production of 61 countries reporting to International Iron and Steel Institute rose 6.50 per cent and India's demand for steel is expected to grow at 6.20 per cent in calendar 2005, according to the institute, mainly due to demand from construction, automobile and consumer durable industries.

However, according to data made available by Centre for Monitoring Indian Economy, global output (excluding China) grew only 0.50 per cent in March 2005.  The global imbalance in demand and supply has led to Indian steel companies enjoying a price leverage.

For example, prices of hot rolled coils and strips were Rs 32,750 per tonne in Mumbai in March 2004 but by March 2005, they had risen to Rs 34,600 per tonne representing an increase of 5.64 per cent.

Domestic companies raised steel prices by Rs 1,500 to Rs 2,000 per tonne in April this year and Tata Steel raised prices even higher by Rs 5,000 per tonne.

However, the stock market performance has been below par as investors fear that demand from China is expected to slow down soon since it will increasingly supplement imports with domestic production.