Tata Steel: Back in favour? - Views on News from Equitymaster

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Tata Steel: Back in favour?

Jun 11, 2009

The Indian stock markets have put behind the worst and have rallied 53% in 2009 till date. During this period, various sectors and stocks in particular have outperformed the index by rising anywhere between 100% and 200%! Banking, metals, capital goods, infrastructure and construction are few of the sectors, which have outperformed the benchmark indices. In this article, we will focus on Tata Steel which has been receiving a fair degree of attention. Let us have a closer analysis on why has it outperformed the markets. The chart beside shows the movement of the stock price of Tata Steel vis-a-vis the BSE-Sensex from the beginning of 2009 to date. The stock has outperformed the index handsomely. To put things in perspective, Rs 100 invested in the Sensex at the beginning of 2009 would have yielded an absolute return of 56% (Rs 156) as on June 10, 2009. However, a similar amount invested in the Tata Steel stock would have appreciated to Rs 192.

If one were to closely observe the movement of the stock and Sensex during the second and third quarter of FY09 when the world was exposed to the global financial crisis, the stock of Tata Steel was beaten down significantly as compared to Sensex. The reasons attributed for the sharp decline in the stock price was on account of the leveraged buyout of Corus in 2007. The investors were concerned about the company's ability to service the debt it took for the acquisitions. Moreover, the demand for steel going forward was presumed to be sluggish.

As a result of these concerns, the stock was beaten down by more than 80% from its 52 week high price. But was this concern justified? We don't think so as the demand for steel in India is expected to remain robust for many years to come due to its low consumptions as compared to other developing nations. Moreover, the domestic operations of Tata Steel continued to remain strong. To put things in perspective, though the domestic operations accounted for around 15% of the consolidated topline but at the operating profit level, it accounted for a sizeable 40% of the company's consolidated profits. Furthermore, the company has significant levels of cash generation, which could have helped it service the debt taken for Corus acquisition quite comfortably over a medium term period of 2-3 years.

Thus, while the markets were pricing the stock as if it were headed for bankruptcy, a closer look revealed that nothing could have been more further from the truth. From a risk reward perspective, the stock did look attractive if one were to take a long term view. Hence, when the sentiments improved, the anomaly was corrected within a space of few months and the stock has really performed well over the past few months. And not just Tata Steel, there are indeed quite a few stocks that suffered far more than what they deserved because of some near term problems but had the resources at their disposal to ride out the pain and emerge stronger over the long-run. All that is needed to unearth such stocks is slightly more extensive study and the stomach to withstand the short term volatility in prices.

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1 Responses to "Tata Steel: Back in favour?"

e anandan

Jun 12, 2009

i fully agree with your views. however how many have to stomach to invest and sit patiently ?

Equitymaster requests your view! Post a comment on "Tata Steel: Back in favour?". Click here!

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