>METALLOID

Pricing shows deep scars globally, margin pressure to resurface for producers


Global steel prices corrected further and benchmark HR price fell below US$575/tonne in CIS markets, down by ~5% MoM and ~12% from their CY12 highs. Global steel production run rate stood at 4.2 MT/day with capacity utilization of 79.6%. Steel production and exports remained high from China but is expected to come down going forward as sharp steel price correction is expected to remove marginal producers from the market. Raw material prices have remained stable to positive due to high steel production led demand (especially from China). Domestic steel prices have remained stable due to weak rupee and import duty cushion but we expect them to come under pressure with sharp fall in global steel prices. We see earnings and margin pressure resurfacing for producers from Q2FY13E and maintain our cautious stance on the steel space.


Monthly steel production stood at 130.6 MT in May-12, up ~0.7% YoY with a daily run rate of 4.2 MT/day and a capacity utilization of 79.6%, down by 170bps MoM. Supply from marginal producers remained high and China’s production stood at 61.2 MT with a daily run rate ~2 MT. Several steel producers announced production cuts due to the sharp fall in prices and low demand and production is expected to soften in June.


HR coil prices corrected sharply in the last few weeks (we had anticipated steel price correction in our last few monthly reports citing rise in production and lackluster global demand) and steel prices in CIS markets slipped below US$575/tonne, down by ~5% MoM. Prices in China also corrected by ~3% MoM and those in Europe and US fell sharply too.


Domestic steel prices have remained flat on account of rupee depreciation and better demand scenario and imports in India jumped ~33% YoY in Apr-May’12. We expect domestic steel prices to come under pressure and global steel prices to remain soft going ahead due to slow uptick in demand. However, production cuts from steelmakers globally would limit the steel price fall from hereon.


Raw material prices have remained stable and iron ore prices hovered in the range of ~US$135-137/tonne for 62-63% Fe grade; hard coking coal contracts for Q2FY13E got settled at US$225/tonne, higher by 7% QoQ.


Iron ore mining in Karnataka is expected to restart from July-12 after CEC started approving the R&R plans of the miners. This is expected to bring ~12 MT iron ore production in H2FY13E and be positive for JSW steel.

Among base metals, LME average prices dropped by 2-6% MoM as demand remained lackluster. Current LME prices remain below marginal COP and we expect limited downside going forward. Inventories remained high overall despite some supply cuts by producers.

Shareholder votes on approval of Sesa Sterlite merger has been cast in the EGMs and the outcome is expected on 25 June 2012.


We remain positive on mining stocks based on strong balance sheets and attractive valuations. HZL remains our top pick in the mining space followed by Coal India and NMDC. We maintain our cautious stance on the steel space and retain sell calls on SAIL and Tata steel as we remain concerned on the sustenance of steel prices in domestic market going ahead. We remain positive on the non-ferrous space due to our expectation of reversal in LME prices and maintain buy on Sterlite.

RISH TRADER

>Siyaram Silk Mills Limited

Suited for growth…
We met the management of Siyaram Silk Mills Ltd (Siyaram) to understand the company’s business and its plans, going forward. Siyaram, a mid-segment textile player, commenced operations in 1978. The company, promoted by the Poddar group (comprising companies like Balkrishna Tyres and Siyaram Silk Mills), started off as a fabric manufacturer and later forward integrated into ready-made garment manufacturing. The fabric segment (primarily polyester blended fabrics) comprises ~80% of the total turnover. The current fabric capacity stands at 50 million metre and the company plans to add another 22.5 million metre over the next two to three years. Siyaram has strong brands like Siyaram, MiStair, J Hampstead, MSD, Oxemberg, Featherz and Little Champ in its portfolio. Over the years, the company has improved its operational performance significantly (the operating margin improved from 8.0% in FY09 to 12.1% in FY12) and has been able to increase the return on equity from single digits to over 20%. Also, considering that the company is a textile player having its own manufacturing facilities, the leverage at sub 1.0x seems quite comfortable.


Healthy improvement in operational performance
Over the years, Siyaram has managed to increase the operating margin from ~8% in FY09 to 12.1% in FY12. This has been possible on the back of lower fixed expenses (branding costs, employee costs, etc). Also, an increasing share of ready-made garments (currently ~15% of sales) has aided this margin expansion.


Strong brand portfolio
On the back of strong branding efforts undertaken by the company, Siyaram has been able to build a strong portfolio of brands. Siyaram (the flagship brand contributing ~50% to sales), MiStair and Featherz are its fabric related brands. Even in the ready-made garments segment, the company has built strong brands like Oxemberg, MSD and J Hamsptead. Comfortably leveraged and healthy return ratios Siyaram is comfortably leveraged with the debt to equity standing at 0.8x (FY12E). The company has a conservative approach towards capacity addition and associated leveraging. Hence, Siyaram has lower debt/equity ratio as compared to its peers. Also, with improving operational performance and better utilisation of enhanced capacities, the company’s return ratios are commendable.


View
At the CMP, the stock is trading at a P/E of 4.3x (FY12 EPS – | 60.5) and 0.9x FY12 book value of | 285.0. Considering the healthy financials and a strong presence in the Tier II and III cities, we believe Siyaram can be a beneficiary of growing rural incomes.

>RUPEE CONDITION

RISH TRADER

>Know the right cost for calculating tax on rights shares

There are times when companies issue rights shares for their shareholders and this needs to be considered closely for the purpose of the calculation of the capital gains or loss that is earned from the investment. This is possible only when the right cost is allocated to the different purchases made under different conditions as will give rise to varying situations. Here are some of the variations that will be faced by the individual and how they can tackle the position.

Rights issue:There are rights issue made by companies whereby they offer the investors additional shares usually at a lower price than the prevailing market price. The new shares are offered in a specific ratio based on the existing shares that are held in the company.  In such a situation the investor is eligible to make the additional investment and they will then have an expanded holding in the form of the initial shares as well as the additional rights shares.  When these shares are sold the question that arises is with respect to the cost that will have to be taken into consideration for the purpose of determining the exact amount of capital gains that are earned in the process. This is not very difficult to understand but what is needs is clarity on the exact situation and how different amounts are allocated for this purpose.

Cost of shares:There are three possible conditions that the investor will face when they are offered the rights shares depending on whether they subscribe to the shares or not and if they choose to renounce the shares. If the answer is yes then there are two elements that will determine the cost for the individual. The first part covers the initial shares that were bought and the cost price for these shares constitutes the amount that they will consider in the tax workings. For the purpose of the calculation of the cost for the new shares the amount that is actually paid under the rights issue for this purpose would be considered as the cost for the right shares. This part of the working is simple to understand.

If the investor does not subscribe to the rights shares and they hold only the original shares then the cost for this original purchase will remain the cost for the individual. The differentiation of the rights shares are important in the sense that is most likely that these are offered to the investor at a lower cost and  hence this will have a lower cost element wherein the capital gains could turn out to be higher when the calculation is made. In terms of determining the nature of the capital gains the holding period for the original as well as the rights shares will have to be considered separately when they are sold.

Renouncing the shares:Another option that is also employed by the owner of the shares is to actually renounce the rights shares in favour of some other investor and the collect a fee for this purpose. When this step is actually undertaken then the amount that is received by the existing investor from the other investor would be considered as a short term capital gains and the cost of acquisition for this purpose will be taken as nil. The period of holding will be considered from the date of the offer made by the company to the date of the renouncement.

On the other side for the investor who has actually taken the renouncement offer from some other investor the cost element will work out to be slightly different. Here the amount that is paid for the purpose of the renouncement plus the amount that is actually paid to the company for the purchase of the rights shares would be considered as the total cost for the investor. 

The author can be reached at arnavpandya@hotmail.com