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March 11th, 2006

Alloy Steel Industry Steel sector can broadly be divided into normal steel and Alloy steel. Alloy and special steel are characterized by their enhanced properties caused due to presence of one or more alloying elements such as Manganese, Silicon, Nickel, Chromium, Molybdenum, Vanadium, Micro alloy grain structure etc. In order to impart special characteristics, varying percentages of alloying elements are added to produce alloy and special steels. There are more than 60 grades of stainless steel. However, the entire group can be divided into five classes. Each is identified by the alloying elements which affect their microstructure and for which each is named. The vast majority of steel produced in the world is carbon and alloy steel, with the more expensive stainless steels representing a small, but valuable niche market. A grade wise bifurcation of aggregate demand of Alloy & Special Steels in India can be seen in the graph shown below. Grade wise Aggregate Demand of Alloy & Special Steels: 2004-05

The user industries of alloy steel are widely spread across varied segments. Alloy steel is used extensively by industries like forging, auto ancillaries, seamless steel and tubes, alloy steel wire rods, railways, engineering, defense etc. In the last few years, application of alloy steel is increasing in consumer items as well as consumer durables and automobiles. Use of alloy steels has enabled the industry to make the machinery light in weight thus making them energy efficient. Use of alloy steels in two wheelers and four wheelers has enabled automobile manufacturers to produce lighter and fuelefficient vehicles. The relative share of these user industries can be seen in the graph below.

KRC RESEARCH

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The gap in domestic availability is likely to increase to almost 1. Most of the requirements of alloy and special steels for the automotive sectors and tractors are routed through intermediate processors like steel forging units. 2006 Share of user industries Demand Supply Scenario Given the changing dynamics in the demand supply pattern within the sector. But the situation has changed and now demand outstrips supply which is further expected to widen by the year 200910.Weekender March 11th. Automobiles industry is the largest consumer of alloy and special steels. spring industries and auto ancillaries. KRC RESEARCH 2 .6 – 2. though more of less balanced as of now. However India has imported a sizeable quantity of special and alloy steel in last few years. From the adjoining table one can see that a few years back the industry was facing severe overcapacities. bright bar industries.0 million tonnes per annum by 201314. the availability of alloy and special steels in India is likely to fall short of requirements from 2008-09 onwards.

The total capacity of this industry is 2. China.Weekender March 11th. approximately 25-30% of the total requirement of auto components is expected to be sourced from low cost countries such as India. New Delhi. at a CAGR of 8. Sunflag is based on sponge iron route. Out of these VISP. which is also based on MBF. The choice of the technology is based on the merits and demerits of various technologies. Major Players and Valuations The current landscape in the Alloy and Special Steel sector in India can be summarized and depicted in the following Table.8 million tonnes per annum. 2006 Alloy and Special Steel Industry in India There are around 20 recognized units engaged in the manufacture of alloy and special steels with an installed capacity of almost 2. SISCOL. Mexico. seamless pipes and tubes etc.7%. EAF (Electric Arc Furnace) and MBF (Mini Blast Furnace) are the most commonly used technology. capital investment and economics of operations. By 2015. Usha Martin are based on MBFs. modeling & drafting. The global auto component market is currently estimated at $1 trillion with OEMs accounting for 70% of this market and the balance being represented by the replacement market. All the remaining recognized alloy and special steel producers are based on EAF technology.2 million tones per annum by the year 2013-14. Leading global component majors are planning to set up shop in India to cash in on the booming industry growth trends. the industry achieved a milestone of $1bn worth of exports. availability of raw materials. Demand for Auto Grade Special Steel has reached at approximately 2 Million tonnes on account of the buoyancy in Auto Ancillary sector. KRC RESEARCH 3 . The demand for alloy and special steel has been buoyant on account of robust demand from user industries namely automobiles. According to a McKinsey report. Demand in the Indian auto components industry is growing at a rate of about 25-30% annually. flexibility of operation.45 million tones in 2004-05 to almost 5.8 million tonnes per annum. Some high profile global auto component dealers and manufactures have set their sights on India. Kalyani Steels. exports are expected to touch $25 billion by 2015. The current upswing in the said sector (which is the major customer of Auto grade Special Steel) is expected to continue in the medium term. The technology being used in the process of manufacturing the products is a key element which determines the overall profitability of the companies. MBF technology is regarded to be superior to the EAF technology. while the automotive sector grew 12% last year. starting from iron ore itself. Some companies make use both these technologies in a combination. According to Industrial Development Services Private Ltd. etc. Brazil. The basic rationale for the large scale shifting of manufacturing facilities to India lies in low labour costs and high quality engineering skills in auto ancillary manufacturing. tooling design etc. auto ancillary units. the aggregate domestic demand for different categories of alloy and special steel is likely to increase from 2. In addition to these Mukand also gets 58 per cent of the production of semis at Hospet Steel. East Europe. India is fast becoming the hub for the $1 trillion global auto-component industry. ACMA expects exports to reach $5 billion by 2010. the status of technology. The prospect of export from India is also a major attraction. The Automotive Component Manufactures Association (ACMA) expects the domestic Auto Component growth at a CAGR of 15% till FY 2012. The global majors are interested in exporting back low cost good quality products to their global factories and other markets to reduce overall costs. Export of auto components from India have grown at a compounded growth rate of 19% over the past six years. During fiscal ’04. Indian manufacturers are now in a position to offer a complete range of engineering solutions including analysis & simulation.

spring steel Manufacturers Aarti Steel Durgapur steel Bhushan Technology EAF/VD/CC EAF/VAD/CC/& Ingots EAF/CC EAF/VD/CC and AOD for Stainless steel Ferro alloy corp. In addition it has EAF/VD/CC at Kalve EAF/VD/CC MBF/EOF/CC MUSCO Marmagoa steels Modern steels 105000 75000 72000 90000 50000 40000 Mukand 250000 150000 Remi Metals Southern Iron & Ispat 72000 250000 40000 30000 KRC RESEARCH 4 . Forging quality steel. 2006 Industry Structure Installed Capacity Tonnes 100000 164000 30000 Current Production 65000 90000 25000 Main Products Forging quality steel Full range of alloy and special steel Forging quality steel Forging quality steel.SS Forging quality steel Wire rods. Hospet. seamless pipe quality steel Billets for forging quality steel. ball bearing quality steel. ball bearing quality steel.Weekender March 11th. Raigarh 140000 MBF/EAF/VD/CC Kalyani carpenter 150000 100000 EAF/VD/CC/and ingots Kalyani steel 150000 100000 MBF/EOF/VD/CC EAF/VD/CC and ingots EAF/CC EAF/CC The company obtains billets from Kalyani. ball bearing quality steel and SS Forging quality steel. specialized and high alloy steels Forging quality steel. seamless pipe quality steel Full range Spring steel Forging quality steel. spring steel Forging quality steel. wire rods. wire rods and seamless steel pipes. 50000 10000 ISMT 240000 200000 EAF/VD/CC Jindal Steel & Power Ltd.

99 12.87 Usha martin 188. Mukand Ltd .00 1176.44 Kalyani steel 279.13 10. The adjoining table shows the relative valuations of the companies in the industry.00 399.39 21.42%) KRC RESEARCH 5 .57 0. companies like MUSCO does appear to have a lot of upward growth potential as it trails its peers.25 EBIDTA (exc OI) 14.05 4. Usha Martin and Kalyani steel.70 1. Mukand steel which is the largest amongst alloy steel manufacturers has a PE of 8.85 12. The EV/Sales for MUSCO is at 0. spring steel. forging quality steel.82 20.48x respectively for them. Net Profit margins are highest for Kalyani steel (12.30x and its Market Capitalization to Sales is at 0.15 14.98 Note: Valuations are based on December TTM basis.43 1.04 17. These companies stand apart from the rest of their counterparts due to their emphasis on efficient manufacturing processes and adherence to product quality standards.14 16.10x while EV/ EBITDA is at 5. Balance Sheet figures are as per latest available Considering the relative valuation of the leading players in the Indian alloy steel industry we see that the market does not seem to fairly recognize the inherent value in these companies. Company Valuations As can be seen there are a number of players in the industry but the leading players amongst these are MUSCO (Mahindra Ugine Steel Company).42 8. the companies are trading at average valuations.79 29. file steel Wire rods.40 675.18 4.30 15.81x and that for Mukand is at 1.53 Mukand 92. wire rods.26 2.58 16.42 CEPS 18.50 836.83 18.Weekender March 11th.69 0. Ltd.43x. Particulars Price Mcap (Rs crore) M Cap / Sales EV/Sales (x) EV/EBITDA (x) P/E (x) EPS MUSCO 129.38x and 8.56 0.38 8. ISMT (Indian Seamless Metal Tubes).02 13. SS Forging quality steel. 2006 Spring steel. and forging quality steel Forging quality steel Full range of alloy and special steel Full range of alloy and special steel Sunflag 200000 200000 EAF/VD/CC Upper Steel Mfg.10 8.97 (%) NPM (%) 8. Thus one can see that even after good margins and superior growth prospects.81 5.36 7.00 2.48 10. 72000 50000 EAF/VD/CC Usha martin Vardhman special Steel Visvesvaraya Iron & steel Adhunik Metaliks Ltd 200000 70000 150000 100000 65000 90000 MBF/EAF/CC EAF/VD/CC MBF/BOF/EAF/VD & CC MBF/ EAF/VD/AOD/LF/CC 100000 60000 Source: Market Survey for Alloy Steels carried out by Industrial Development Services Pvt. Looking at EV / EBIDTA ratio.02 0.

Stock Exchange Tower. KRC refrains from publishing any individual names with its reports. we believe the sector will see sharp re rating. As a matter of practice. Overall the industry offers a huge potential to the companies which are cost efficient and confirm to strict quality norms. While in case of normal steel. seamless tubes. 1102.Weekender March 11th. Phone : 91-22-56338050 Fax : 5633 8060 Members: BSE & NSE www. Conclusion Alloy steel is altogether different from plain vanilla steel in terms of applications. The industry has been doing well in light of changing scenario in the demand pattern. Dalal Street. is not liable for any decisions taken based on the same.18%) With bright growth prospects for the alloy steel industry. does not bear any responsibility for the authentication of the information contained in the reports and consequently. engineering and forging manufacturers which are the end users of the alloy steel products are showing improved performance which in turn will result in the demand for the alloy steel. Due to the peculiarities in the processing and customization requirement it cannot be compared with normal steel both in terms of dynamics as well as valuations. Further. As per SEBI requirements it is stated that. KRC Research Reports only provide information updates and analysis. Mumbai 400 001. The automobile. Ltd.Kisan Ratilal Choksey Shares & Sec Pvt Ltd.com KRC RESEARCH 6 . Kisan Ratilal Choksey Shares & Sec Pvt Ltd..krchoksey.. a product is manufactured according to the capacities installed. Around 400 varieties of steel are manufactured which depicts that products are manufactured according to the requirements. Kisan Ratilal Choksey Shares and Securities Pvt. 2006 followed by MUSCO (8. Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services. and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation. investors are advised to satisfy themselves before making any investments. While the information contained therein has been obtained from sources believed to be reliable.