MarketsMOJO downgrades Welcast Steels to 'Sell' due to weak fundamentals and technical trend

On July 15, 2024, MarketsMOJO downgraded its stock call on Welcast Steels, a microcap company in the iron and steel industry, to 'Sell'. This decision was based on several factors that indicate a weak long-term outlook for the company.

One of the main reasons for the downgrade is the company's weak fundamental strength. Over the last 5 years, Welcast Steels has seen a negative compound annual growth rate (CAGR) of -19.52% in its net sales. This indicates a decline in the company's revenue, which is a cause for concern.

Additionally, Welcast Steels has a poor ability to service its debt, with an EBIT to Interest (avg) ratio of 0.29. This means that the company's earnings before interest and taxes are not enough to cover its interest expenses, which could lead to financial difficulties in the future.

Moreover, the company's return on equity (ROE) is only 2.54%, indicating low profitability per unit of shareholders' funds. This is a red flag for investors as it shows that the company is not generating enough returns on the money invested by its shareholders.

From a technical standpoint, the stock is currently in a mildly bearish range. The technical trend has deteriorated from mildly bullish on July 15, 2024, and the Bollinger Band and KST technical factors are also bearish. This suggests that the stock may continue to decline in the near future.

However, there are some positive factors to consider. Welcast Steels has declared positive results for the last 3 consecutive quarters, with a higher profit after tax (PAT) of Rs 2.58 crore and the highest profit before depreciation, interest, and taxes (PBDIT) of Rs 1.40 crore in the last quarter. The company's net sales for the last 9 months were also higher at Rs 71.69 crore.

Furthermore, with an ROE of 13, Welcast Steels has an attractive valuation with a price to book value of 2.3. The stock is currently trading at a discount compared to its average historical valuations, making it a potentially good investment opportunity.

In the past year, Welcast Steels has outperformed the market (BSE 500) with a return of 71.29%, while its profits have increased by 99.2%. This has resulted in a low price to earnings growth (PEG) ratio of 0.2, indicating that the stock may be undervalued.

It is worth noting that the majority shareholders of Welcast Steels are promoters, which could be a positive sign for the company's future performance.

In conclusion, while MarketsMOJO has downgraded its stock call on Welcast Steels to 'Sell', there are some positive factors to consider. Investors should carefully evaluate all the information and make an informed decision before investing in the company's stock.