Mahindra Ugine Steel Company: Bad Times?

For those who do not know, Mahindra Ugine Steel Company (MUSCO) is an M&M group company engaged in metallurgy.

I had been reading an old Annual Report of Mahindra Ugine (2006-07). They had very optimistic estimates about the next year, which we all know, was bad. And it was bad for the company as well. Most of their growth, they felt at the time, would come from the automobile sector. That did not quite happen as expected. The company was marginally well off in the next year, and posted a loss in the next. Although their net income rose steadily-

Year Net Income(profit)
2006 615 crore (65 cr)
2007 717 crore (45 cr)
2008 922 crore(29 cr)
2009 1073 crore(-18 cr)

Now that's what has happened now- momentarily it looks bad- a company whose profits are plummeting every year end! But look outside the braces. The net sales or operating income has risen steadily and now is an impressive 1000 crore plus. The company does have potential for growth in the automobile sector. How? Here's how.

Carmakers around the world are finding it expensive to manufacture cars in their homelands- increased labour cost (cost involved in paying the labour and maintaining it- eg, the healthcare bill) being one of the major factors. They may move to cheaper and more feasible parts of the world. One of them being India. GM has already been operating plants in India. Volkswagen is expected to come, and Toyota had been planning a second plant. Now if they're going to make cars, they're going to need steel. MUSCO makes that kind of steel- and that's good for the entire bunch of suppliers such as MUSCO.

We have a company here, that paid good dividend last year- and the year before last to its shareholders. Rs 3 per share is what it paid. Now going by the CMP (of around 30), that's a very good return (10%). If you can get these shares cheaper, it would be even better. From the historical record of the stock's trading on the bourses, the stock has reached highs of around 110 and al low of 17. But it does make sense when the price is very down, and the company is posting losses inspite of increased turnovers- to buy shares of such a company.

Keep an eye on this one- you don't want to miss a good dividend paying share in the sunny days (if they ever they come!).