Steel firms outshine IT companies in profit

By agencies   |   Wednesday, 01 June 2005, 19:30 IST
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NEW DELHI: Major steel companies have shown stronger growth in profit after tax (PAT) compared to major technology companies but the brick and mortar giants have under-performed compared to tech companies in the stock markets. Major steel companies like SAIL, Tata Steel and Jindal Vijayanagar Steel, have witnessed PAT growth ranging between 23.39 percent and a huge 178.29 percent for the quarter ended March 2005. In comparison, major technology companies like Satyam, Infosys and Wipro recorded quarterly PAT increases ranging between 33.59 percent and 65.88 percent. However, in terms of stock market performance it is an altogether different story with investors not gaining as much in steel stocks as they did on technology stocks. IT companies showed changes in value between January 3, 2005 and May 30, 2005 of between 9.22 percent and 7.64 percent while steel companies showed only decline and by a larger quantum of between 27.97 percent and 6.82 percent. Steel being a commodity, is subject to cycles and hence enjoys lower valuations in stock markets than do IT companies. PAT growth for steel companies has been strong because of an exploding commodities cycle worldwide and strong demand from China. In March 2005, world steel production of 61 countries reporting to International Iron and Steel Institute rose 6.50 percent and India's demand for steel is expected to grow at 6.20 percent in calendar 2005, according to the institute, mainly due to demand from construction, automobile and consumer durable industries. However, according to data made available by Center for Monitoring Indian Economy (CMIE), global output (excluding China) grew only 0.50 percent in March 2005. The global imbalance in demand and supply has led to Indian steel companies enjoying price leverage. However, the stock market performance has been below par, as investors fear that demand from China is expected to slow down soon since it will increasingly supplement imports with domestic production. Also, input prices of steel have been rising inexorably. Freight costs have risen 288 percent over the last two years. Prices of iron ore rose 100 percent in January 2005 over March 2003. With limited domestic supply, large quantities of iron ore need to be imported, leading to the higher cost. Prices of coke, another major input, have also jumped 111 percent over the last two years according to a study by Assocham.