Tata Steel: Bottomed out

Increasing concerns on iron ore and coal supplies as well as soft domestic steel prices saw the Tata Steel stock correct by about 20 per cent in the last two months. While concerns on steel prices remain, after this steep correction, the negatives are largely factored in the share price. Some foreign brokerages have upgraded the stock, helping it post six per cent gains in two days. Further, analysts like Giriraj Daga at Nirmal Bang Institutional Equities expect the trend of margin improvement in Tata Steel Europe to continue, with softerraw material prices accruing benefits. Daga remains positive on the stock, with a target price of Rs 669.

The concerns on Tata Steel started intensifying after news of royalty hikes for iron ore mining came in. Though the royalty hike from 10 per cent to 15 per cent was to impact Tata Steel's FY16 earnings per share (EPS) by two per cent, concerns over iron ore supplies aggravated as iron ore mining was halted in Jharkhand and Odisha. However, since the matter is to be negotiated between state governments and the companies, analysts believe the problem will get resolved soon. The Supreme Court's decision on coal blocks, too, has got over.

Analysts at Kotak Institutional Equities in their September 30 report have revised upwards their FY16 and FY17 EPS estimates for Tata Steel by 1.5 and 2.7 per cent, respectively.

The benefits to Tata Steel India are also likely to accrue as the company commissions the first phase of its six-million tonne plant in Odisha, expected by March 2015. Analysts expect the company's India volumes to grow to 9.5 million tonnes and 10.7 million tonnes in FY16 and FY17 respectively, compared to 8.5 million tonnes in FY14.

Antique Broking estimates that steel demand will recover in 2HFY15/FY16, with gross domestic product growth of 5.5-6.5 per cent and recovery in investment cycle.

Tata Steel Europe, on the other hand, is likely to benefit from the sharp drop in international iron ore and coal prices, which would partly offset lower European steel prices. For the quarter ended September 2014, analysts at Bank of America Merrill Lynch expect Tata Steel's standalone profit (Rs 1,591 crore) to grow by 5.3 per cent year-on-year and consolidated profit (Rs 761 crore) by 17 per cent year-on-year, even as sales growth is pegged at five per cent and 2.8 per cent, respectively.


                                                                                                                             
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