What's hot among smallcap steel stocks?

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What's hot among smallcap steel stocks?

Bhavin Chedda of Pioneer Intermediaries picks out stocks from the steel sector that are looking good at this point.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Bhavin Chedda of Pioneer Intermediaries says that Monnet Ispat's valuations are attractive, and it has a good scalability potential.

He also likes Mukand, Jindal Stainless and Mahindra Ugine.

He further says that they prefer Kirloskar Ferrous post its restructuring over Kalyani Steel

Kirloskar is a dark horse and will gain from lower coke and pig iron prices, believes Chedda. 

Excerpts from CNBC-TV18's exclusive interview with Bhavin Chedda:

Q: Can you identify three or four small steel companies which are relatively strong and you could play them for a bounce?

A: Among the smaller or midcap range, stocks that investors can look into and companies which are doing well are; Mukund Limited , Mahindra Ugine , Monnet Ispat and Jindal Stainless , these have been doing well. The latter two may be classified in the midcap range rather than the small cap range.

Q: What do you like about Monnet Ispat and about Mahindra Ugine?

A: Monnet Ispat as everybody knows the raw material will be the key advantage that most of the steel players will enjoy. This company has off late acquired mines particularly iron ore and coal mines and now 100% of their coal is already from their captive mines. Their iron ore mines have just started and within six months even iron ore's prices will go up internationally and domestically, in the coming financial year.

Monnet Ispat will be 100% captive in that. This along with capacity expansion is its key product, basically sponge iron has been expanding its capacity at Raipur and Raigad. On a valuation perspective it is still available at 4-5 times forward earnings and it is a good mid sized company with good scalability potentials. There is still a lot of value left in this company. Mahindra Ugine is into alloy steel, the prices of alloy steel are not that volatile as carbon steel and off-late they have got good orders from auto segment and they are doing quite well.

Q: Would you buy Kalyani steels and Kirloskar Ferrous ?

A: Kirloskar Ferrous Industries looks attractive to me because off late it has gone through restructuring. It reduced its equity by 50% basically by reducing the face value from Rs 10 to Rs 5, but the number of shares have remained more or less the same. Basically, it is into pig iron and castings and both their divisions are doing well. Last year the company faced a setback because of the shortage of the key raw material coke and also coke prices went as high as USD 400, twelve to fifteen months back, but is on a downward spiral now. Coke prices currently are USD 170-180. So basically for Kirloskar Ferrous Industries, the raw material prices are coming down. The demand as well as the prices are looking up, so this company can be dark horse in coming days.

Kalyani Steels can be again classified into the midcap to large cap range. Capacity expansion is happening at Kalyani Steels, the key advantage of Kalyani Steels is that the company has its own iron ore mines where the prices are going up every year. Kalyani Steels is into alloy steel where the demand is quite strong and is also a supplier to auto and engineering sector where the order book position looks quiet strong. So that is again another company, which can be looked into but the problem with this company is the operating margins have not been improving despite the company having the advantage of raw material as well as the capacity going up. So I believe that they have to improve on the operation styles dramatically to witness a re-rating from here.

Any disclosures:

Some or all the stocks which I have discussed, maybe held by my company or clients.