Mid-cap steel scrips buck selloff trend

Steel stocks seem to be grappling with a broad selloff, nevertheless, several mid-cap steel stocks have managed to outperform BSE Metals index and the Sensex over the past fortnight.

Steel prices are under pressure, with prices of hot rolled coil steel down about 20 per cent year-on-year in the December quarter.

Still some mid-cap steel players have taken a number of steps to protect operating margins, which is helping them hold their ground even as the steel giants get hammered on the bourses.

For instance, some mid-cap steel companies recently acquired captive supplies of key raw materials and enhanced the proportion of higher-margin products in their sales mix.

Case in point: Mahindra Ugine Steel Company which gained almost 8 per cent over the past fortnight as compared to a 0.8 per cent fall in the Sensex, for the same period. Sentiment for this stock has been aided by key input costs like sponge iron prices easing about 5-7 per cent in the last few weeks.

In addition, analysts highlight that the company is a supplier of higher grade alloy steel to the automobile industry, which is expected to help it minimise the impact of a general weakening in steel prices.

In the second-quarter of the current financial year, too, the company's key steel division saw its profit expand 34.52 per cent year-on-year to Rs 21.43 crore.

Meanwhile, Monnet Ispat has seen its stock price increase 7.2 per cent over the past fortnight, while Uttam Galva has gained almost 2.7 per cent.

Investor sentiment for the Monnet Ispat scrip was buoyed by the company's recent acquisition of iron ore reserves in Orissa, which are estimated at 30 million tonne. The buyout should, over the next few quarters, help the company reduce its cost structure substantially.

Higher input costs like iron ore had eroded the company's operating margins, which fell 863 basis points to 26.5 per cent in the second quarter of the current financial year.

The BSE metals index fell 0.45 per cent over the past fortnight, largely due to Tata Steel weakening by 6.1 per cent, while SAIL dipped 4.2 per cent in the same period.