This Tata Stock is Shining at the Right Time

Part of the Tata Group, Tata Steel is Asia's first integrated private steel company.

Established in 1907, the company has presence across the entire value chain of steel manufacturing from mining and processing iron ore and coal to producing and distributing finished steel products.

Tata Steel is a leading steel producer globally, with a total crude capacity across three countries. It operates at a capacity of 34 MT - India (24 MT), UK (3 MT), and Netherlands (7 MT).

In India, it has a network of 250 distributors and 20,400 dealers covering nearly 95% of the districts in India. The company is a leading supplier to the automotive industry with a market share of 38%.

The company enjoys a significant cost advantage, with full integration in iron ore in India and 20% integration in coking coal.

The price of the company's stock is up about 70% over the last one year and almost 25% in 2024. The stock has been an investor favourite over the years.

Recently the stock is in the news again. Over the last one month, the stock is up nearly 10%. Today, the stock was up 3.7%.

Mega British Grid Agreement

Tata Steel has signed an agreement with National Grid Plc's, Electricity System Operator, to build power infrastructure for the 3.2-million-ton electric arc furnace at Port Talbot by 2027.

This would be an important milestone for Tata Steel UK in its path toward improving profitability by replacing its blast furnaces with electric furnaces.

Tata Steel had announced that it will decommission both blast furnaces at Port Talbot in 2024 and build a new electric arc furnace.

Electric arc furnaces, while significantly greener than coal-fired furnaces, the new process is also much less labour-intensive. This helps the company reduce costs and boost profits.

The company has been on a path to reduce costs in its European operations to boost profitability. The switch to electric arc furnaces is one of the main steps the company is taking to this end.

Financials

Tata Steel's annualised revenue growth was 9.1% from FY19-23, mainly due to growth in sales volume.

The company's operating profit (EBITDA) grew by a CAGR of 2.1%, whereas the net profit of saw a degrowth of 2.5% in the last five years.

Captive iron ore and coal mines and captive power have helped the company reduce its production costs. But the net profit and EBITDA took a hit in FY23, mainly due to its European operations.

There was a margin compression led by low realisations, and high input costs which affected the entire company's profitability. The company has worked a lot on reducing its costs and improving profitability by replacing the blast furnaces with electric furnaces.

While the Indian business has churned a profit, the European business has been a big drag for the company, although the situation is turning around.

In terms of return ratios, the company's performance is good. The five-year average RoE for Tata Steel is 14.2% and the five-year average RoCE is 17.1%.

What about debt?

The company has improved its financial health substantially, repaying a large amount of debt in the last five years. The c of Tata Steel has fallen from 1.2 to 0.5 over this period.

The company is focused on reducing the debt on its balance sheet despite investing heavily in its expansion plans and has laid out clear plans for the same.

Tata Steel has planned investments of Rs 340 bn for the next two years to ramp its capacity to 30 MTPA by 2030. It's also developing new products to widen its product portfolio.

The company also entered into a joint venture with UK government to set up electric furnace and minimise the cash loss from the UK business.

Finally, in terms of dividends, Tata Steel has done well. Its dividend payout ratio has moved up and down in recent years but in FY23 it paid out almost 55% of its profits.

To know more, check out Tata Steel's factsheet and quarterly results.

Conclusion

Going forward, the market expects a decent showing by the company in FY24 and FY25. The market is very sensitive to any commentary by the management on the company's European operations.

Other aspects that investors will have to watch out for are steel prices as well as the company's cost of production. Another point to be closely tracked is the company's progress in expanding its capacity.

Investors must exercise caution when considering commodity stocks like Tata Steel for investment. These stocks tend to be highly volatile and thus may not be suitable for every investor's risk profile.

As with any stock, investors must perform their due diligence before considering an investment.

Happy investing.

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