Durvel Steel cuts its guidance for EBITDA per tonne from Rs 12,000 to Rs 10,500 on volumes of 15 mt. The stock falls 8% on a market cap of Rs 40,000 crore. The sector trades at 6x EV/EBITDA. Was the fall an overreaction if the cut lasts one year, or if it is permanent?

A permanent cut is worth about Rs 13,500 crore and a one-year cut about Rs 2,250 crore, so the Rs 3,200 crore fall prices in roughly a temporary hit. Rs 1,500 a tonne on 15 mt is Rs 2,250 crore of EBITDA. For one year that is 5.6% of the equity; permanently, at 6x and with debt unchanged, it is 34%. The 8% fall implies about 1.4 years of lower margins, so the question is whether the cut outlasts that.

Per-tonne guidance times tonnes. Rs 1,500 less per tonne on 15 million tonnes is Rs 2,250 crore less EBITDA, a 12.5% cut from Rs 18,000 crore to Rs 15,750 crore. Write it that way because steel analysts think in spreads per tonne, and a portfolio manager will ask you to rerun it at other spreads without rebuilding the model.

Think of a house bought with a large loan. If the house loses 12.5% of its value, the loan stays the same and the owner's stake takes the entire loss. At 6x, a permanent Rs 2,250 crore cut removes Rs 13,500 crore of enterprise value, and because the Rs 68,000 crore of net debt does not move, all of it comes off the Rs 40,000 crore of equity: 33.8%. A 12.5% cut in the business is a one-third cut in the shares, which is financial leverageUsing borrowed money so that a change in the value of the business produces a larger percentage change in the value of the equity. working in reverse.

Turn the fall into years. Rs 3,200 crore divided by Rs 2,250 crore a year is about 1.4 years of lower EBITDA, before tax and discounting. The same framing explains the multiple: at 6x, a permanent change is worth roughly six years of it, so a permanent cut would justify a fall more than four times larger. On an after-tax basis, a year of the cut costs about Rs 1,688 crore, and the fall prices closer to 1.9 years.

It depends entirely on duration, and your job is to have a view on that. If the cut lasts one year, the fall is modestly too large; if it lasts two years or more, the stock has further to fall; if it is permanent, the fall is a quarter of what it should be. Import-driven price cuts can last while the imports last, so ask what would end them: a trade remedy, a recovery abroad, capacity closures. Add the leverage point: net debt rises from 3.8x to 4.3x EBITDA on the new guidance, so a long cut also raises the risk of the equity, which can push the multiple down, not just the EBITDA.

A strong close sounds like this: the market is pricing about a year and a half of lower spreads; I would be long only if I believed the import pressure fades within a year, and I would want to see regional prices turning before sizing up, because with this much debt the downside if I am wrong is a third of the equity.