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Is steel being re-rated?

Aditya Mittal said in an interview that steel trade is a much more stable industry than it was in the past and it should have a much higher valuation, reports Ranju Sarkar.

india Updated: Jan 31, 2007 21:22 IST

In a recent interview, Arcelor-Mittal CFO Aditya Mittal said the steel industry was "undervalued".

"Steel trades at 5-6 multiples, it is a much more stable industry than it was in the past, it should have a much higher valuation, should trade much higher. I think that the multiples or the price that either Tata or CSN ends up paying for Corus is the evidence of that because CEOs or entrepreneurs believe in the future of the steel industry, but the market does not and that is the difference."

Tatas' offer of 608 pence per Corus share vindicates Mittal's stand. This values Corus, on an enterprise value basis, at a multiple of 9.0 times its earnings before interest, tax, depreciation and amortisation (EBITDA) from continuing operations for the twelve months to 30 September 2006, excluding the non-recurring pension credit of £96 million.

Is the steel industry being re-rated? "The steel industry will get re-rated. If you look at the valuation multiple of base metals like copper, nickel or aluminium, steel is twice discounted," said Tata Steel CFO Kaushik Chatterjee. In fact, he reckons that re-rating of steel will be much more when the upturn in steel cycle is sustained overtime.

One good example is the current up-cycle. When steel prices touched a high in 2003, many analysts said that the peak had been reached, but prices kept going up for two years and held onto the higher levels in 2006.

This has been driven by demand from China, which has increased the base, while consolidation helped steel-makers reduce cost in the system.˜The transaction multiple is higher than the trading multiple as it reflects the strategic value," explained Chatterjee.