Tata Steel Ltd

Money Times - - Stock Watch -

(BSE Code: 500470) (CMP: Rs.574.95) (FV: Rs.10) (TGT: Rs.750+)

Es­tab­lished in 1907, Mum­bai-based Tata Steel Ltd (TSL) man­u­fac­tures and dis­trib­utes steel prod­ucts. It of­fers hot-rolled (HR) and cold-rolled (CR) coated steel coils and sheets, pre­ci­sion tubes, tire bead wires, spring wires, and bear­ings; auto an­cil­lar­ies for the au­to­mo­tive mar­ket; and bear­ings, gal­va­nized iron wires, agri­cul­ture and gar­den tools, con­veyance tubes, fenc­ing, farm­ing and ir­ri­ga­tion equip­ment for the agri­cul­ture mar­ket. It also pro­vides steel doors and win­dows, roof­ing sheets, plumb­ing pipes, tubes, pre­fab­ri­cated and rooftop houses, wa­ter kiosks, mod­u­lar toi­lets, of­fice cab­ins, cor­ro­sion-re­sis­tance steel, cut and bend bars, PC strands, ground gran­u­lated blast fur­nace slags, etc. In ad­di­tion, it of­fers CR, coated, HR, tube, wire rod, ferro chrome and man­ganese, boiler tube, pipe, fer­roshot and metal­lic prod­ucts for use in pan­els and ap­pli­ances, fab­ri­ca­tion and cap­i­tal goods, fur­ni­ture, LPG and weld­ing ap­pli­ca­tions as well as process in­dus­tries such as ce­ment, power and steel in the in­dus­trial and gen­eral en­gi­neer­ing mar­kets. The Usha Mar­tin (UML) ac­qui­si­tion by TSL was a smart move. It was done at 30% dis­count to green­field capex cost as the plant has strong back­ward in­te­gra­tion and an at­trac­tive long prod­ucts port­fo­lio in close vicin­ity to TSL’s fa­cil­i­ties. We be­lieve that sev­eral op­er­a­tional is­sues have plagued UML’s op­er­a­tional per­for­mance over the years and ex­pect TSL to achieve a much bet­ter op­er­a­tional and fi­nan­cial per­for­mance from the same as­set. We see sev­eral syn­er­gies and ex­pect EBITDA to im­prove by Rs.1500-2000/tonne. We also ex­pect TSL to aban­don its fur­ther in­or­ganic ac­qui­si­tions ef­forts given that UML has given the long prod­ucts ex­po­sure it was look­ing for. Though the ac­qui­si­tion looks pricey on

trail­ing fi­nan­cials, we be­lieve that it does not rep­re­sent the po­ten­tial and hence, an un­due at­ten­tion to the same might be un­war­ranted.

De­spite fac­tor­ing in the ac­qui­si­tions of both UML and Bhushan Power & Steel, we ex­pect Net Debt/EBITDA for con­sol­i­dated op­er­a­tions (ex­clud­ing its Euro­pean busi­ness) to re­main in a com­fort­able zone of 3.1x (v/s 2.9x at FY18 end) which al­lays street’s con­cerns on TSL’s bal­ance sheet get­ting stretched again. We be­lieve that a much larger as­set base of TSL’s do­mes­tic busi­ness, shift­ing of Euro­pean busi­ness to JV with ThyssenKrupp and its large cash flows in the cur­rent steel cy­cle will help keep the bal­ance sheet in a healthy po­si­tion.

TSL cur­rently en­joys strong spreads and cash flows in its do­mes­tic busi­ness led by strong steel pric­ing, back­ward in­te­gra­tion ben­e­fits and im­proved con­ver­sion cost met­rics. The man­age­ment’s goal of dou­bling ca­pac­ity in In­dia over the next 5 years is within reach with the ac­qui­si­tion of 6 MMTPA ca­pac­i­ties and KPO phase II ex­pan­sion of 5 MMTPA. We will keenly look for man­age­ment views on fur­ther par­tic­i­pa­tion in in­or­ganic growth but ex­pect it to halt now and hence, ex­pect TSL to not pur­sue Bhushan Power & Steel now.

We see do­mes­tic as­set ac­qui­si­tions be­ing value ac­cre­tive in the medium-to-long term due to at­trac­tive prod­uct port­fo­lios and strong pos­si­bil­ity of ma­te­rial syn­er­gies. We also draw com­fort on the bal­ance sheet front due to shift­ing of Euro­pean op­er­a­tions to JV and strong cash flow gen­er­a­tion in the resid­ual busi­ness led by low cost do­mes­tic op­er­a­tions.

Tech­ni­cal Out­look: The stock looks good on the daily chart for medium-term in­vest­ment. It has formed a down­ward chan­nel pat­tern on the daily chart and a close above Rs.610 with good vol­umes will push the stock higher. The stock trades be­low all im­por­tant mov­ing av­er­ages like the 200 DMA level on the daily chart. Start ac­cu­mu­lat­ing at this level of Rs.574.95 and on dips to Rs.530 for medium-to-long term in­vest­ment and a pos­si­ble price tar­get of Rs.750+ in the next 12 months.

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