Hats off to ur conviction in GPIL & ur backing up of the same with 40% allocation to it. I’ve done that a few times myself in my portfolio & must say it truly generates the alpha required to get a small portfolio multiplied. I hv a couple of questions regarding this : -
The data & insights u mention at GPIL thread - Are these just ur assessments/interpretation of data from steelmint & other sources or have u also done sm on ground scuttlebutt on GPIL on how this business is progressing?
U mentioned that GPIL gradually became 40% of ur portfolio. So do u start with sm fixed allocation & thn let it run/add to it or is it a subjective call based on valuation?
Considering that u had sm insights on Iron-ore & Steel products industry, did u considered Tata Steel Long Products ( erstwhile Tata Sponge) too? While nt a direct GPIL competitor - the theme & valuations were quite similar smtime back. And instead of Capex, here the story was thr merger with Usha Martin(completed) & subsequently with Tata Metalliks ( In progress).
Looking forward to hearing ur views on above.
Thanks!!!
Disclosure :- Invested in both GPIL & Tata Steel Long products albeit a smaller allocation in portfolio & playing as a theme on cycle upturn.
This will help many people understand on what has changed in iron ore mining industry in India in 2020.
There is HUGE change, and companies like Tata steel are bidding for an iron ore mine at 141% premium which will lead to a perpetual loss to them. Are small investors smarter than management of Tata Steel?
Yes, I generally start with a 10% allocation and then add as my conviction increases. Even today, I bought some more shares of GPIL.
Yes, I looked at Tata steel long- it doesn’t have its own mine. One should understand that there are 2 key areas of value addition or big margin in steel industry-
Having your own mine
Having a specialty steel plant.
GPIL already has 1) and is now going to build 2). Tata steel long has Neither.
Merger is not equal to capex. There is equity dilution or big debt addition and it takes time to turn around the acquired company. Also, bids are at high price. It is an auction.
Hope this helps.
Also, posting a picture of last 11 years revenue and operating profits of GPIL. The profits increased after March 2020 mines auction in Odisha which changed the iron ore availability in India.
I am invested in GPIL and Meghmani twins…I find valuation comfort in them for the earnings they make…I see them doing good for next 2-3 years and these can become 3x in that period…though GPIL I treat as a cyclical and will look to exit once the steel cycle ends…
Yes, GPIL looks cyclical as of now because earnings are from pellets whose prices fluctuate a lot.
In just a few months, this cyclicality will reduce somewhat when expanded capacity of billets, sponge iron, wire rod etc goes online. Prices of these products are lot more stable, and they also add to additional margins over pellets.
Further, 3-4 yrs from now, it will be a specialty steel producer.
The prices of specialty steel are lot more stable plus it has high margins too.
The cyclicality will reduce big time 4 yrs from now, while earnings will be lot more as well.
Meanwhile, Pellet prices remain stable in India (today’s update on steelmint), even more than a week after iron ore in China fell to 100 USD.
Meanwhile iron ore price is back up to 112-114 USD.
Short term fluctuations don’t matter to GPIL because it has already locked in contracts till Oct-Nov at much higher prices as disclosed on TV interview.
Tata Steel Long Products has been repositioning itself as specialty steel player by focussing on Alloy Wire Rods business. Their current debt is at 1424 cr with a debt to equity ratio of 0.55 after the acquisition. Their free cash flow is at 1,649 cr. They have leased the Vijay-II mines to avoid supply issues. This is from their 2020 annual report - “The Company has also taken
several initiatives to improve its presence in the chosen
segments of the domestic market by enhancing reach and
increasing share of business with the customers. This has
resulted in the sales growth of 41% (Y-O-Y) in the domestic
special steel business amidst the industry de-growth of
about 13%. With the focus on product mix enrichment and
diversification, the Company has increased alloy Wire Rod
mix to 49% in FY 2020-21 as against 37% in FY 2019-20
while increasing the market share to 20% in FY 2020-21
against 12% in FY 2019-20, supported by increased share
in Two-Wheel Steering (“2Ws”) segment.”. This is from their 2021 annual report - “On the market front, the Company has been able to consolidate
its position in Special Bar Quality (“SBQ”) by increasing its
market share from 9% in FY19 to 12% in FY20 (MS in H2-FY20:
15%) amidst a de-growing automotive industry. It has also
made in-roads in Non-Automotive segments focusing on L&E,
Tractors and Railways, collectively constituting 25 kt sales and
kept a keen focus on enriching its Wire-Rods sales mix towards
Alloy Steel in FY20. The proportion of Alloy Wire-Rods has
increased from 29% in FY19 to 37% in FY20. Continued focus and
concerted efforts towards operational efficiency and synergy
initiatives helped to reduce the crude steel cost substantially
by ~ `12,000/t in Q4FY20 from the year beginning level, 75%
of which is sustainable (operation efficiency improvement &
synergy with parent company).”. Though the numbers posted by TSLP are good and the valuation is decent, I find market to be unappreciative. I am sure market knows better than me and would like to understand what is that I am missing here.
Since, it is going to be merged into another company, we need to look into it as per the merger ratio and not as a standalone company.
Similarly, Tata Bhusan steel Tata BSL is also very cheap, but there also merger ratio with Tata steel is already decided. And, you need to look at number of tata steel shares you will get, and not the valuation of tata BSL per se.
Makes perfect sense to me. I could reason out on why not to invest in BSL (because of a merger with a reasonably valued/overpriced company) but did not consider TSLP merger with Tata Metalliks. Rookie mistake. Let me take into consideration to see if the valuation is still cheap. Thanks Manas !
not only is Tata Steel LP getting merged with Metalliks, it is coming out of a consolidation frm Usha Martin merger as well :-
Why the mkt undervalues : - Basically, the co. took on lot of debt to fund Usha Martin’s acquisition which it is bringing down subsequently. The earlier co. Tata Sponge Iron - was also a well maintained & well run co. albeit in a tough industry. Post Usha Martin acquistn, the cycle upturn helped thm reduce the debt. However, the mkt might still be seeing it as a leveraged commodity play. So basically leverage & Tata Metalliks merger overhang is wat’s keepng the stock valuations in check.
However, going thru the data points shared by @Kumar_manas, I blv this co. too will emerge as a good profitable business with its transformation from Sponge Iron to specialty steel products. I’m basically playing this theme as a basket of stocks - both Tata Stee LP along with GPIL & probly a special situations play with adding NMDC.
This is purely due to my style of investing & nothing to take away from the brilliant analysis & conviction presented here by Manas.
@Kumar_manas :- Sorry for hijacking the thread with Tata Steel LP discussion . Feel free to flag & we can probly move the last part to Tata Sponge thread.
Let me compare these 3 buckets. Since, I already compared them for me earlier-
1. Tata steel long- you have to view this co as a combined entity with tata metaliks. Since merger ratio is already fixed, you can’t view this as a standalone entity.
Another thing is they don’t own iron ore mine. A lot of recent profitability gains may be due to cheaper raw material inventory and not because of permanent increase in margins.
2. NMDC- From a pure business point of view, this is an excellent asset light, very high free cash flow business. But the use of that cash is very poor because of very bad promoter. they use the cash for CSR (above the required limit), dividends (too high), employees bonus, and inefficient steel plants leading to huge erosion of value of cash. The cash they generate is nearly worthless for the shareholder.
3. GPIL- they own the mines + it has a good promoter which uses the cash for expanding integrated steel capacity, for building high IRR power plant (170 cr additional EBITDA, 24% IRR on 750 cr capex), decent dividends (10-15% of profits only), and for further building specialty steel plant that would have high margins and ROE.
So, thats why instead of dividing my money among the three, I chose the one which has best features of first two.
Great going with the original posting of a concentrated portfolio. You must have a conviction beyond most other investors to be so so so concentrated. There are many roads to success in investing, and just as I would only buy 1 or 2 or 3 stores in a city and operate it, if I strong conviction, you are doing the same with Stocks.
But, I would recommend that what is happening with China today will happen at some point in time with India also. Japan went thru this a couple decades ago, and now it is China’s turn. Remember, the FIIs go “hot” on the hottest economy and throw it away as if it is a cigarette stub. It did that with many economies if you see a chart of which country (as a sector) makes it to the top in any given year. There is a fund manager that puts that together. Brazil was in that list at one point in time, and so was Israel etc.
Coming back to your allocation per stock, I would advice you to go into the same strategy but invest into the top 2-3 companies of that market, and hence when there is a Gold/Silver/Bronze winner of market share, you will be invested in that sector/industry thru the 3 companies. So, for example if you love IT, you would have invested in TCS + HCL + Mindtree or Infy + LTTS + TechM or some other combo you like. So, when market-share shifts, it does not hurt you much, but when the entire IT sector goes down, you will see all 3 correcting. This was you are still concentrated but less so, with a spread of risk.
Hope this idea helps. I implement it all the time for example I am in top 6 Real Estate Stocks from Oct-2020 to Mar-2021 since I did not know who will win huge, big, great and good. It has worked out well…
Thank you. However, I did not understand this point.
Steel use is proportional to GDP per capita.
India steel usage/capita is very very low, similar to paper use or plastic use.
Every incremental increase in GDP per capita in India, will lead to much higher increase in steel usage per capita.
Once basics like food, clothing is covered, people progress to buy a vehicle, home, kitchen utensils, so steel usage increase much higher once that inflection point of GDP per capita is crossed.
From a macro point of view, India steel consumption is going to vertically move up in next 10 yrs.
Just that no research report is able to see this yet.
Also, India was an iron ore surplus country till 2020. A very fundamental change happened in 2020 when the mines allocation rules changed to an open auction mechanism. The big steel players are taking away these mines at 140% premium which has never happened before.
Just 2-3 days ago, Tata steel won a very big mine at 141% premium and market has been stunned by this move of Tata steel.
So, we have a situation of increasing demand over next 2 decades, but very limited supply!
Over and above this, valuations are at very low level to give a very good comfort. Risk is minimal if a stock is at 3 PE, in my view. Valuations matter!
Morever, risk is a function of execution, corporate governance and business strength.
Here, I feel all three are pretty good and there are examples of all 3 happening.
What I am talking about is the Nikkie performance from 1950 to 1990 and then from 1990 to 2021. When global business and global funds shift to a country, we get the bull, then we get the bear. We can justify what happened to Japan, but you can see it clearly from the chart at Nikkei 225 Index - 67 Year Historical Chart | MacroTrends this site shows what happens.
Is it time for China to start to experience Nikkie from 1990 to 2021 starting in 2020?
And, then is it time for Indian Markets to experience the 1950 to 1990 of Japan starting in 2004.
Worrying about these macro trends will change the way we invest and how we invest, and how much we diversify.
Hope this helps.
KKP
PS: I agree with your short term assessment of China and India relative to GDP.
Indian index and top companies like Bajaj finance, Dmart etc are so expensive (GPIL EBITDA and PAT > DMART EBITDA and PAT), that I will not be surprised if our index doesn’t give any return for next 5 years or more.
This is very much a possibility.
Individual stock returns have no correlation to the index however.
That’s why I have chosen companies with very low valuations and very high growth prospects + long lasting business strength. So that I am not impacted by index performance.
Yes, I have been doing some serious sector rotation from 2016 and it has worked out well. Investing in fallen angles has worked out well for me from that time. Pharma was 1st, IT was next, FMCG was 3rd, and most recently Real Estate starting Oct to Mar, Hotels from Jan to June, and now Entertainment from Sep to Dec. In a bull market this strategy works well, since these were beaten down sectors, and I would buy multiple ones in each sector. My disadvantage is that I am not in India, do not know all of the companies and good vs chor management, ground 0 feelings, and hence go to charts once I know which sector I want to get into.
Good luck with your valuation and concentrated portfolio approach. It is working for a friend of mine (analyst) also who analyzes balance sheets and management to the nth degree, and then puts big money into it. Mix it with “sector selection” ahead of the cycle (peaceful buying, instead of panic race to buying Real Estate in Sep-Oct’2021 for example!).
To give a context on valuations, the closest peer of GPIL is Sarda energy.
Sarda energy EV = 4100 Crores (it has debt of 1700 cr)
GPIL EV = 4100 crores
Sarda energy last quarter EBITDA = 272 cr
GPIL last quarter EBITDA = 573 crores
(can compare previous quarters too, GPIL is more than 2-3x of sarda EBITDA)
(Sarda hydropower plant will add additional 175 cr EBITDA/year, and GPIL solar power plant will also add 170 crore additional EBITDA)
Moreover, Sarda energy mine is smaller, it has to buy 50% of iron ore from outside. So, some of the gains in EBITDA would be due to cheaper raw material inventory gains.
Sarda and GPIL are neighbors. Their mines are located adjacent to each other.
Iron ore price now above 120 USD “A few pellet players are offering standard grade pellets at $170/t CFR China but we are yet to observe firm buying interest. Price indications currently could be around $150/t CFR levels”, highlighted a trader.
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