SG mart as well as APL has struggled this qtr with lowering steel prices. Biggest concern that I see here is maintaining margins and the additional discounts they like to give.
On the call the management explained, 0.8% ebitda, incase of no inventory loss would’ve been 1.7%. In falling pricing environment they still resorted to discounted pricing.
SG mart is still new its good the business model is being tested early during volatile pricing environment and they can work the problems out.
I don’t doubt volume capability but I believe they should fiercely defend their target margin.
Disclosure: invested with keen watch on its discounting + margin trend
The problem with (So called) investors, so impatient, they build a lot of things in their analysis models, even a slight disappointment is looked with microscope. But hardly businesses run in that way.
If this is a Start up or Tech company or E-commerce company, with the sales growth, volumes they achieved in last 5 quarters, no margins questions would have asked.
Lots of Billion dollar sales businesses still burning lots of CASH.
Yet they are profitable at both EBIDTA and PAT. Such is the Business they started with decadal experience from APL, in Steel manufacturing.
But the investors did not emphasize on the margins in the first place. Management has time and again pointed to the robustness of the business due to margins being razor thin. They say margins are protected for the year which only time will ascertain. If margins can collapse due to a grey swan event then question must be asked, what are other such events we should look out for?
Demand reduction can be another black swan event. China is dumping a lot of steel and our domestic production is also going up so steel prices may continue to be under pressure.
The 2nd question and answer you’ve mentioned - one from Ms Alisha - is from the previous concall. But the answer management has given is extremely relevant in this quarters results. The entire pretext of preserving the thin margin under all situations has been shaken. They said inventory days is 8, even if two price revisions happen each month - roughly 15 days each - how does this affect margins so severely is hard to understand.
One minor point was that during stressed periods they have to offer more discounts to their customers, which had lead to fall in margins. But this again points to weak pricing power. Overall disappointed with commentary
This is exactly what happened.
Good Management will understand the unprecedented situation and play a long game rather than short term gains. They have to protect their customers/distributors.
what pricing power we r talking here - This is a commodities trading business with razer thin margins - Period.
They are trying to build business - a "organized service" in these commodities.
Understand this maybe the effect of long term vision rather than short term profits, which is a great thing for longevity of business. But I believe they should have been more transparent about these scenarios in last concall where they clearly stated that 2.5% margin is low, but it’s very secure.
As for “pricing power” - it may not be the correct operative term here, lack of knowledge on my part, but it does convey the core idea - “if you have to lower prices to sell off your product, you don’t control the price you will sell at, hence no pricing power”. Commodities have no differentiation, so the lowest price seller will sell - agreed. But the entire point is that management should have put forth these constraints more transparently
A small thought: this business is very widely tracked and might be priced to perfection. So in short term it’s supposed to underperform. If things play out as mgmt has guided it will create good wealth in long run. If things don’t play out as mgmt has guided then wealth creation will not be there. It’s to be seen how they manage their margins.
Same margin for all 3 segments is seems of current Q comment. In August 2024 con call they indicated as
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40,000 ton of processed steel every month which gives us 4% to 5% EBITDA margin.
Hence they have higher margin for service centers however in last Q it was same for all segments - that may be concluded.
I think, as investors in SG Mart, we should accept that in this kind of trading business, there will be inventory losses, once in a while. Even the inventory procured for service centers and distribution business will also suffer from these kind of losses. There are no 2 views about it. However, how often will this kind of movement happen in the steel price, is anyone’s guess and history is our feeble guide?
I was speaking to a very respected investor who himself is into steel trading business and confirmed that even they are not immune to such movements and mostly hold 1 month worth of inventory.
IMHO, we should put this kind of episode behind us (perhaps, market has already done that, going by stock price reaction), and recalibrate our calculation for FY25.
This episode per say is not a company specific bad event and it’s an industry wide situation. This doesn’t kill the business model. This is my humble reading of the situation.
We should keep our guards up for other pieces of the business, like the business model around, service center (demand/supply etc etc), and the distribution of unbranded stuff (angle/channel etc… )
BIS license for exporting steel products to India from China is expiring on Jan25 and for renewal it will take lot of time, hence import of steel from china will decrease in near future and steel prices should remain firm in india.
Basically, SG Mart’s main business model or their vision is that they would become the largest steel buyer in India and this would give them some sort of bargaining power with steel producers that would help them protect / improve their margins as they would become the preferred buyer for domestic steel companies.
What I was trying to imply in my previous post was that if this market suddenly become very lucrative then bigger steel traders like Marubeni can simply increase their buying allocation in India (they have the luxury to buy at lowest prices from 50 countries currently) or other companies who’re currently not into steel trading can simply enter into this market. Marubeni does have an Indian subsidiary - https://marubeni.co.in/
The startups I mentioned are not into this segment currently because of lower margins but they have the balance sheets to easily enter and create competition. This is what the management has been saying is another one of their strengths compared to unorganized sector (their buying power).
If you do a Porter’s five forces analysis of this industry, you would realize the fact that the margins are not in SG Mart’s hands and wouldn’t be until they reach their 2030 vision of 30k Cr sales and even then it might not.
When global steel trading giants can’t protect their margins (although their margins are better owing to global purchasing ability), then how can SG Mart at this small of a scale.
The primary reason to invest in this company should be the huge and growing TAM (steel companies are planning I think 10-11% CAGR volume growth - Revathi engineering AR) and that margins are too low and volatile so as to be very lucrative for a big player to enter into this segment (see what happened in paints industry when Grasim entered into paints sector as the ROCE was much higher in it compared to their core industry)
Also, did anyone notice that their B2B marketplace website is still not up and running fully. I can’t just go on and place an order. They talk a lot about digitizing this landscape in their B2C vertical and that there is no B2B platform (which is not true, at least for TMT bars which is the highest TAM product, there are a few).
Someone raised an interesting point in the concall that the management was confident in giving out margin numbers in their Sep-24 Arihant capital discussion but then reported completely different numbers.
Not sure what that person expected from the call? For mgmt. to discuss Q2 revenue and margins on 28th of September before earnings release? It sounded like a very dumb point to me harping on the same Q again & again and almost trying to blame the mgmt. on why they didn’t tell about the Q2 margins in the call.
