Metal stocks valuation at 25-year low

Market cap of top-4 metal producers at 11-yr low on China woes; price-earnings lowest since early 1990s

The economic slowdown in China has hurt Indian metal companies. The combined market value of the country’s top four metal producers —Tata Steel, Hindalco, Vedanta and Steel Authority of India Ltd (SAIL) — is at an 11-year low, while their valuations are the lowest in 25 years. Currently, these stocks are valued at half their book value (net worth), only a fifth of their overall investment in fixed assets. Previous lows include 0.8 times the book value in March 1999 and one time the book value in March 2009.

The top four companies have a combined market value of Rs 84,742 crore, half their combined net worth of Rs 1.7 lakh crore, while their total gross block (cumulative investment in plant and equipment) stood at Rs 4.4 lakh crore as of March-end this year.

For FY15, the four companies reported combined revenue of Rs 3.53 lakh crore, an operating profit of Rs 24,444 crore and adjusted net profit of Rs 8,125.5 crore.

The analysis is based on financial year-end market capitalisation and consolidated financials for the four metal producers since 1991-92.

Vedanta’s (earlier Sesa Sterlite) figures for the period before FY13 include those of Sterlite Industries. In August 2013, Sterlite merged with Sesa Goa to become Sesa Sterlite, which was subsequently renamed Vedanta.

Experts say metals stocks might continue to languish for some more time. “There is negative or flat growth for industrial metals in the world’s top economies, thanks to a slump in the manufacturing sector.

It has been worsened by the economic slowdown in China, the biggest consumer and producer of ferrous and non-ferrous metals,” says Kishore Narne, head (commodity), Motilal Oswal Financial Services.

The global slump in commodity prices has turned metal companies into one of the biggest wealth destroyers on Dalal Street. The sample companies’ combined market cap is up 2.4 times since March 1992, despite a 32-fold jump in their assets (gross block) and 28.6-fold jump in their revenues during that period.

In all, the companies have added around Rs 4 lakh crore to their balance sheets in the form of additional equity and debt since 1991-92 but their market value is up only Rs 50,000 crore during the period.

A company creates wealth and economic value when the incremental market value is higher than the incremental growth in its balance sheet.

Contrary to the common perception, demand growth is the prime concern of metal producers, not high indebtedness or balance sheet stress. Companies were much more indebted in FY02, with a debt-equity ratio of 1.92 compared with 1.53 now.

The sector was, however, more profitable in the past. The operating margin of 7.2 per cent in FY15 was the lowest in the 23-year period, reflecting the slump in metal prices globally.

Demand growth looks like it is some time away given the uncertainty surrounding Chinese growth trajectory that accounts for nearly half of the global metal manufacturing capacity.