The reasons for this is not far to seek. Besides an imminent price hike, outlook for the steel sector is changing for the better. With cement prices on the rise due to higher offtake, there is bound to be higher demand for steel. For example, in construction activities, for every kilo of cement consumption, there is a minimum of 300 grams of steel consumption.

According to projections by Infac, the demand may grow by more than 5.4 per cent; in 1999-2000, all the more reasons for a rise in steel stocks. SBI Caps assistant vice president Prateek Agarwal says that steel stocks can outperform the Sensex in the next three to four months. The reasons can be volume growth and higher prices if demand increases.

Volume growth can explain rise in other steel stocks suchas Essar, Ispat and SAIL. Last year, most of the steel companies including SAIL operated at lesser capacity. Production at SAIL was down by approximately 10-12 per cent in 1998-99, compared to the production level of 1996-97. In addition, some of the plants were closed for some time for carrying out mordernisation activities. In fiscal 1999-2000, the plants of SAIL are expected to be running at full capacity if there is a demand surge.

As for Tisco, the cost cutting achieved in the last fiscal and the cash expected from the sale of the cement division to Lafarge are the main earnings driver. At an operating level, cost of production per tonne of steel was less by 1.8 per cent, compared to last year. The lower operating cost was partly because of the rise in continuous casting to 81 per cent as on March 1999 from 64 per cent as on March 1998.

The company intends to raise it to 95 per cent in the current year. The company saved Rs 200 crore on coal, following closure of one-two mines owned by Tisco atJoshibora, where the cost of mining was Rs 1,900 per tonne. The company shifted its mining to West Bokaro, where the cost of mining is a mere Rs 700 per tonne.

The second important parameter behind the re-rating of Tisco is the sale of the cement division. The sale would also add Rs 100 to Rs 150 crore (40-50 per cent of the current year's profits) to the bottomline in the next fiscal, as the book value of the plant is around Rs 350 crore. Also, the sale of cement divison will result in manpower reduction by 1,200, resulting in still higher productivity per employee for the company.

The only negative factor in the Tisco earnings model is the treatment of the employee separation scheme. But according to analysts tracking the sector, these are one-time expenses and reduce the salaries and other benefits provided by Tisco for its employees in the long run and thus, the lower cost helps the bottomline of the company.

In the current year, the company plans to reduce workforce by from 59,235 as on March 1999to 56,000 in March 2000. This will lead to a cash outgo, but there is greater chance that the market will react positively as the labor cost will reduce and the productivity will improve.

Finally, the company intends to complete the cold rolling mills (CRM) plant in March 2000. This will improve operating margins further, and also the bottomline. This does call for the re-rating of Tisco, if not the entire range of steel stocks.