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Steel: Who's performed better?

Aug 25, 2008

In last few articles, we have discussed the performance of P&L accounts and balance sheet of Tata Steel and SAIL . In this article, let us see how have the stock prices of these companies moved between the period 2003 and 2008 (till date) and compare them with each other in terms of returns. The chart below shows the returns the investor got from investing in the stocks of both the companies between the period 2003 and till date (Aug - 08).

We see from the graph that if one had invested Rs 100 in Tata Steel in Dec 2003, he would have earned returns at a CAGR of 17% while a similar investment in SAIL during the same period would have grown to Rs. 274, a CAGR in the region of 24%.

As we know, share prices are nothing but indicators of an investor's expectations of a company's future earnings. So if we see from the graph, investors expected both the companies to grow in a similar fashion till 2006. However, the period after that witnessed a sharp diversion in the share prices of both the companies with SAIL significantly outperforming its private sector counterpart. The strong spike in the share prices of SAIL from 2006 till 2007 was a result of its strong realizations and expansion plans to double its capacity. Moreover, firm realisations aided the company's growth. Tata Steel on the other hand went out of favour due mainly to the leveraged buy-out of Corus, which analysts felt would put pressure on its near to medium term cash flows. However, the stock price recovered once the funding became clear and the company continued to rake in profits in view of the favorable industry environment.

However, since the start of calendar year 2008, the stock prices of both the companies have mirrored the overall poor sentiment for Indian equities. SAIL has been hit the hardest, with its market value eroding by as much as 50%. The weakness in the stock could also be attributed to mounting cost pressures both on the operational as well as capex front. The earnings of Tata Steel standalone on the other hand continued to rise. This might be the reason it was not as badly hammered as its public sector counterpart. What also helped was the past track record of the company and its ability to maintain strong margins even in the down turn of economic cycle.

To conclude, while it pays handsomely to invest in the weakest company when the sector is ripe for a turnaround, one has to time the entry and exit perfectly in order to extract maximum benefits out of the same. With the benefit of hindsight, we can no doubt say that 2003 was one of the best periods to invest in SAIL and one should have exited at the peak of 2007, but in reality it may be one of the toughest decisions to make. Hence, rather than relying on market timing, it pays to stay invested in a company that has a long track record of consistent profit growth and stable margins.

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