Tata Steel stock is red hot at bourses amid many triggers
The company’s m-cap is up 27% in April so far, and has trebled since Sept 2020
After being a market laggard for more than a decade, Tata Steel has suddenly become one of the hottest stocks on the bourses. The company’s market capitalisation is up 27 per cent in April, so far, and has trebled in value since the end of September 2020, against a 28 per cent rally in the benchmark BSE Sensex during the period.
The stock was one of the top performers among the index stocks on Thursday. It ended the day with gains of 6.1 per cent, to close at a fresh lifetime high of ~1,031.6. This was also the first time that the Tata Steel stock price broke into the four-digit territory.
Tata Steel investors have waited for nearly a decade to make money on their investment in the stock. The stock took nearly 13 years to go past its 2007 high ~924.
The immediate reason for the rally in steel stocks is the latest policy of the Chinese government to discourage polluting industries in the country, including steel. The Chinese government has withdrawn export subsidies on over 100 products, including hot-rolled steel. The government also cut import duty on steel imports into the country.
Analysts say the latest move by China will raise steel prices globally, and reduce steel exports from China, benefitting Indian metal producers, such as Tata Steel which has a global footprint.
"China is signalling that it now wants to limit domestic steel production as it aims to cut its carbon emissions and reduce air pollution. This improves the export opportunity for Indian steelmakers and compensates for any potential decline in domestic sales volume due to the second wave of Covid-19," says Shailendra Kumar, CIO Narnolia Securities.
Analysts also see steel as a play in the global economic recovery after the Covid19-triggered decline in economic activities in 2020. "The manufacturing purchasing manager's index (PMI) is up in all G20 countries except for India. This signals a strong demand for metals, especially steel. The demand growth has come at a time when steelmakers are sitting on little or no inventory, leading to higher price realisations and profits going forward," says Dhananjay Sinha, head institutional equity Systematix Group.
According to him, steelmakers are also benefiting from a weakness in the dollar due to a recent decline in bond yields in the United States. The depreciation in dollars translates into a higher price for metals, including steel.
Analysts see Tata Steel among the top beneficiaries of the global recovery in steel demand and prices. The company’s European operations account for nearly half its revenues, unlike its other Indian peers which are largely domestic marketfocused companies.
Tata Steel is also likely to gain from its relatively low valuation compared to industry peers. The stock is currently trading at the Ev-to-price-to-book value ratio of 3.4x. against JSW Steel’s 5.8x. Tata Steel is also cheaper on the market capitalisation-to-book value ratio and Ev-to-ebitda or operating profit ratio.
EV or enterprise value is the sum of a company's market capitalisation, its gross debt minus cash & equivalents on its books. EV is a better gauge of steelmakers’ overall valuation compared to market capitalisation, given large debt on their books.
Tata Steel current EV is ~2.21 trillion against JSW Steel EV of ~2.18 trillion. However, JSW Steel market capitalisation is nearly 50 per cent higher than Tata Steel's m-cap.
Analysts expect Tata Steel stock price to gain from a potential decline in its debt level over the next two years. "We expect Tata Steel to use the cash generated from higher profits in the current cycle to reduce debt, which will boost its market cap even if EV rises only slightly," says Shailendra Kumar.
Analysts at Systematix Group have a price target of ~1,200 on Tata Steel, nearly 20 per cent higher than the current level. The only risk for the company is a potential decline in production and sales volume in India due to the second Covid wave.