Key Indian Metal Stocks: Public vs. Private Sector Performance

Includes: IFN, IIF
by: Equitymaster

Its amazing how things change. Some time ago, metals stocks were the front-runners for investors’ money but now have emerged as among the least favourites. The situation on the Indian stock markets is no different. The sector stocks have been in a free fall on the back of fears of global economic recession.

As can be seen from the above chart, some key Indian metal stocks have had a sharp decline in their value over the last six months. If one would have invested Rs 100 in Tata Steel in may 2008, the value of his investment now would have been Rs 38. Similarly for Hindalco it would have been Rs. 46, for SAIL it would have been Rs.59 and Nalco Rs 79.

Surprisingly, the value of public sector companies [PSU’s] in the metal space vs. Nalco and SAIL which are considered less efficient as compared to their private sector counterparts, Tata Steel and Hindalco, has seen relatively smaller erosion.

A closer look at these companies reveals that the consolidated balance sheets of the private sector companies have became much weaker as compared to their PSU counterparts. It should be noted that both the private sector companies under consideration have done huge leveraged buy outs in recent times.

Furthermore, the revenue models of the private sector companies have changed significantly after the acquisition. Significant portions of their revenue now come from the developed world, which is experiencing a slow-down of greater magnitude than emerging economies.

SAIL on the other hand has most of its revenues coming from the domestic market where growth is likely to be higher than the developed markets. In the case of Nalco, although the company derives a substantial part of its revenues from exports, its balance sheet is a lot less leveraged than its private sector peer and hence, the advantage.

To conclude, though value of the private companies have been eroded more than their public sector counterparts, it should not be forgotten that their businesses are not likely to disappear anytime soon. The road to recovery though looks long and full of bumps.