Please find below my thought process:
Steel sector dynamics -
- We can use the above to track steel prices
- My observation is any price above 4000 yuan per ton, which is roughly 41k INR per ton, Indian steel mills are profitable
- Below this, the mills struggle
- 4k yuan per ton was Q4 average prices
- Right now we can see spot is at least 500 yuan more
- So 10% more realization and mostly higher EDITDA at least 5% more margins (rough estimate given higher jaws)
- So basically we can expect good results June quarter for all steel companies
- In fact better than March quarter
Monnet thesis -
As is known Monnet was taken over by JSW and Aoin via NCLT process
- Steel products are many types- broadly intermediaries and finished steel. Steel mills buy iron ore and coal and first convert to steel pellets first. Then they process pellets to finished products.
- In case of monnet they have a 2.4 million ton plant
- And all they were doing so fat is producing pellets
- That’s low margin business
- Pellets sell for 25000 Rs per ton approx. So margin is 1000 Rs per ton approx.
- So 2.4 mtpa implies 240 Cr EBITDA per annum, if they do just pellets
- I see they are 100% utilized producing pellets
- Now from 2020 Jan quarter they started converting pellets to end products - billets and TMT bars
- Realization is 45000 Rs per ton
- Margin is 10000 Rs per ton
- For Jan quarter they did 135kt of these end product’s
- Implies 135 Cr EBITDA + pellet EBITDA of some 50 Cr
- That’s why we are seeing 200 Cr EBITDA
- Now last year they did very less of these end products
- Next Year guidance has been released
- They said they can do 630kt end products
- That’s 650 Cr EBITDA p.a.
- Plus some 200 Cr from selling rest as pellet
- If we see capacity is 2.4mtpa
- 630kt is roughly 1/3rd only, Rest is pellets.
- So for FY22 , if prices sustain, we can see 800 Cr EBITDA
- Less interest and amortization of 500 Cr
- That’s 300 Cr pre tax profit
- And post tax some 250 Cr. . That implies forward PE of 8x roughly
- Which is fair. .
- What’s interesting is when they ramp up end product sales - 2.4mtpa at 10000 Rs, Implies 2400 Cr EBITDA
- Assume margin dips to 5000 Rs. . (That’s super bear case)
- EBITDA = 1200-2400 cr
- That implies forward PE of 1x
- But for long term… and assume prices hold and assume they don’t take more debt or expand etc
Risks to the above -
- They are steadily ramping up - operational issues in ramping up will be very costly for minority investors
- Price wise… this is a manipulated stock… Lower circuits and upper circuits imply rampant trading and speculation
- Steel.prices should sustain these high levels.
- On supply side
-. The issue is companies will.come up with expansion plans
-. Jsw steel said they are going to become 38mt pa very soon
- That’s massive…
- For any new mill to be put up it takes 2-3 years
- Even jsw steel takes time
- So price looks safe for 1-2 years
- Unless China takes a U turn and starts manufacturing steel at cheap prices like before
- N they set up plants very quickly too
- Will impact prices
Please offer your critical view of the above.
Disclosure: invested 33% of my overall portfolio. Average buy price is 38 Rs hence I am already sitting on a good profit. Please don’t buy just based on above. Please do your own analysis.
All the above figures are approximate numbers to derive a back of the envelope calculation only