Steel stocks have been volatile over the last couple of weeks because of the weakness in global commodity prices as well as skepticism about whether the unusually high operating margins can sustain.
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Rakesh Arora of Goindiastocks.Com feels the market is underestimating the true potential of steel companies.
“Market is underestimating two-three things,” Arora said in an interview to CNBC-TV18.
“One is the deleveraging because the way the cycle is going, the amount of cash these companies are throwing is insane. Meaning you are doing Rs 30,000 per tonne of margin, and the capex cost for a new steel plant is around Rs 60,000 per tonne. So the payback is like two years, so you are going to payback a new steel plant in two years’ time,” Arora said, adding that the market was underestimating the cash, these companies are throwing.
Arora is bullish on Tata Steel and Steel Authority of India.
He feels investors are mistaken in trying to draw parallels with the crash following the 2008 global rally.
“Most of the analysts and investors have a memory of 2008 global rally, which happened and post that there was global financial crisis and they saw a big drop. Nothing like this is happening this time around because the crisis has already happened and we are into that huge liquidity boom driven by monetary policy easing then we have got fiscal support coming in from the government.
So we are into continued demand support. So we are in for a stronger for longer theme and that is what the street is missing and valuations are extremely low,” Arora said.
For the full interview, watch the accompanying video.