Commodity and Cyclical Plays


(Mridul) #450

Guys…unsolicited advice. Don’t use p/e multiples with such extreme cyclical companies. 8 p/e is cheap but not for cyclical company. Cyclical company is considered cheap when no one wants to buy it (when it is barely managing).

P/e will skyrocket if after 3 years it cannot sustain this profitability. So employing p/e to value these companies is a recipe for disaster unless one knows when to jump out of ship before it sinks.

One should rather use normalized earnings with such companies to determine valuations.


(madhavikkutti) #451

Dear @Mridul, Thanks for the opinion on this.

While P/E is not perceived to be as an effective mechanism for valuing the cyclical stocks, I doubt if normailzed earnings can either be used to understand the right valuations of Graphite India, considering the “special” situation in which it is in currently. Please let me know if my understanding of the “normalized earnings” itself is right.

I can calculate the normalized earnings by taking an average of the earnings of the company for the past say 10 years, assuming that it went through one complete up-down cycle over the past 10 years. However, will the above figure help in the case of Graphite India? The unprecedented rise in the price that we have seen recently cannot be attributed to its regular up/down cyclical trend, but due to a special situation, which is China crackdown on pollution.

As per reports, whatever China has done on pollution is an irreversible process and the crackdown is likely to continue in future also. Also, as per reports, Graphite electrode shortage is likely to continue for the next few years (at least for 5 years) for various reasons.

Graphite India’s average EPS is Rs. 7.26 over the past 9 years, when I believe it has seen one complete up/down cycle. How do we make use of the above figure as a guideline to determine whether the stock is currently undervalued or overvalued with its current TTM EPS of Rs. 26.71? This question becomes even more relevant especially since I have estimated very high EPS’s of Rs. 88.3 for FY19 (if we assume GE price of USD 8,000) and Rs. 285.2 (if we assume GE price of USD 20,000). Also, there is an expectation that, similar earnings may be repeated for the next many years also.

Sorry to ask one theoretical question, but I think it will help in getting my doubt clarified a lot. What if the company did really achieve an EPS of Rs. 285.2 in FY19, which is more than 10 times the current TTM EPS? Don’t you think the stock price would increase significantly, especially since there is an expectation that the same EPS may be reproduced over the next few years also? Or, will the stock price not increase, fearing the very low historical normalized earnings of just Rs. 7.26?

Your valuable thoughts on this will be appreciated.


(Mridul) #452

Normalized earnings, by definition, are adjusted to remove the effects of seasonality, revenue and expenses that are unusual or one-time influences.

P/e is not the right measure, i will tell you why. Look at metals now…imfa is at 4x, earnings potential still intact till steel cycle is up. Still why it has been hovering around 4-5x from quite some time? It is because may be it has attained sort of seasonal peak after which they have to go for capex to grow by volumes rather than realizations.

Better indication for such cyclicals to determine peak valuations is EV/EBITDA. Just peek into history to determine max multiples and the conditions existing then.

With extreme commodity one can never be sure. So time for entry with good MOS is import. I would not comment specifically on graphite as this is again a special situation. Length of cycle can vary, but i would look for margin of safety from here. If u r sure it can improve earnings from here or utilization is not at peak., And global supply won’t be back, well take your call. There can be other issues when a sector makes extreme money…other related industries may struggle leading to issues. It cannot be defined as every instance is different with different triggers


(madhavikkutti) #453

Thanks Mridul. GE represents only a small share of the input cost for the steel producers. Hence, I think, steep pricing by the GE manufacturers is unlikely to bother the steel industry much. The struggle could instead be on whether the EAF producers can manage to source sufficient GE (due to its shortage) so that their production is unaffected


(Jiten Parmar) #454

Correct. Mridul. My philosophy has always been to sell at about 6-8 times peak earnings, in case of cyclicals. Or atleast, be very alert. Definitely never buy at these.


(rajeev kumar choudhary) #455

(rajeev kumar choudhary) #456

Graphite electrode market to reach 2 million ton by 2020,now it is 1.7 million ton.out of 1.7 Mt,china has capacity of around half of that but China has got limited UHP electrode manufacturers (UHP electrode is most preferred in EAF).Now China wants to go for quality products and also China is planning for 13℅ EAF which is now 5℅.so export from China that also of UHP is going to be limited


(Raj A A) #457

Article on Steel 360 March edition may throw some light on GE situation globally.





(Raj A A) #458

image


([email protected]) #459

Hi @madhavikkutti - Was looking for the historical price of Graphite electrodes with no luck.
Can you please share the link from where you are tracking the GE prices.

Thanks,
Pandi


([email protected]) #460

Thanks @Raj_A_A for sharing the insight full article, good study on the GE story.


(madhavikkutti) #461

Hi @pandi.rao, I doubt if any site provides the historical prices. I track prices through various news articles. For instance, Sachit Jain from Vardhman Special Steels today told CNBC TV18 that, the GE price increased 6 times since May-17 and currently stands at around USD 15,000 per ton. Please watch the video here:


([email protected]) #462

thanks @madhavikkutti for the details.


(Mehnazfatima) #463

Monthly chart of Hind copper with Andrews pitchfork

This is for those who are long term fundamentally bullish on the prospects of hind Copper

The stock has today touched the downside target of 65…this is a good price to make additional purchase in Hind copper…for the next few months, the stock may move along the lower forkline with a + or - 5 rupees price range…or maybe even a 10 rupees range…

but when the stock leaves the lower forkline…then it moves towards the middle forkline

Discl…holding a big qty at higher price…holding for long term…


(tbhavesh) #464

Hear the above video…Graphite Electrode prices has shot up to $14500 / Ton


(Jiten Parmar) #465

Perfect cycle playing out in front of us. Sugar, an upcycle of 2 years, superb wealth was created. And see, what is happening in downcycle, huge wealth gets destroyed. Luckily for me, it played out perfectly. Had exited sugar quiet a while ago. Timing is very important in commodity cyclical plays.

One of the slides in my presentation, talks about huge underperformance in downcycle. Seems to be playing out now.


Sugar Cycles: 7-8 years of losses followed by 2-3 years of super gains!
(krrish seth) #466

Jiten thanks for the guidance

One should accumulate now as the many stocks making new lows and down considerably

Your views on steel & copper cycle will be helpful


(Jiten Parmar) #467

One should look at supply. Which is abundant in sugar. I am not investing in any sugar stock at this point.


(Mridul) #468

Invest in sugar once demand matches supply, which will happen close to 2022. Current demand is 25 MT, production guidance for this year is 29 MT. Sugar demand in India rising around 5% pa. Sugarcane yields are rising fast as well. And we are not able to export as international prices are way below ex Mill prices. SO unless there is some sort of government subsidy on exports, downslide will continue. Government may intervene to some extent but low sugar costs are not bad for the government in election year. There might be some pull back, but the downward movement will continue for next few years unless something big happens that changes this demand supply situation drastically.


(Akshay Kumar) #469

I think krrish seth’s question is abt investing in steel and copper cycle now, Please confirm