A Rant on Tata Steel Limited Share
(Disclaimer: This is just for information purposes only; this is not an investment recommendation. Prospective investors should consult their investment advisors before making any trades.)
Tata Steel Limited: This is not a stock for the faint-hearted. Like all metal / natural resources stocks, its price volatility is high. You may have observed it's a high-beta stock.
Globally, it's a big steel company--one of the ten largest steel companies. As far as net profit is concerned, financial year 2021-22 is a blockbuster year for Tata Steel--but I doubt whether this can be repeated in the next few years. Its European operations have done well last year.
Sales- and profit-wise, the steel business may be nearing peak. Historically, we pick up metal companies when their price-earnings (P/E) ratios are at high levels, say, at 70 or 80--when the profit cycle is at the bottom. At the peak of the business cycle, metal stocks quote at low P/E ratios, like, 5 or 10.
Globally, it's a big steel company--one of the ten largest steel companies. As far as net profit is concerned, financial year 2021-22 is a blockbuster year for Tata Steel--but I doubt whether this can be repeated in the next few years. Its European operations have done well last year.
Sales- and profit-wise, the steel business may be nearing peak. Historically, we pick up metal companies when their price-earnings (P/E) ratios are at high levels, say, at 70 or 80--when the profit cycle is at the bottom. At the peak of the business cycle, metal stocks quote at low P/E ratios, like, 5 or 10.
Supply Side
One peculiar thing happened with steel sector on the supply side in the past 12 to 14 years in India. Due to the convoluted provisions of IBC (Insolvency and Bankruptcy Code), four or five big steel makers had cornered five big troubled steel companies referred to NCLT (National Company Law Tribunal) when the steel cycle globally was at the trough--meaning these top steel companies were able to buy big and debt-ridden steel companies (saddled with high debt at that time burdening India's public sector banks) at a cheap price.
It appeared at that time that each big steel company was able to buy one big troubled company--as if they knew which company to buy for their advantage--without any competition from other big players. Due to certain IBC provisions, other players were not allowed to bid for these troubled companies--giving what appeared to be an unfair advantage to these big steel makers.
If you don't believe what I say, please consider the following:
1) Tata Steel took over Bhushan Steel
2) Vedanta Ltd bought Electrosteel Steels
3) ArcelorMittal cornered Essar Steel
4) JSW Steel & Aion Investments bought Monnet Ispat & Energy
5) JSW Steel acquired Bhushan Power & Steel
See five big companies bought five big troubled firms without any inter-biding war by other players. Is it a coincidence that these firms did not compete for other troubled firms? Only private players bought these troubled companies, but government companies, like, SAIL, could not bid for any of them, why?
These big players were able to buy them from troubled government banks at a deep discount (that is, with big haircuts). Ultimately, big steel players benefited at the cost of poor government banks!
As no new capacities were created in the steel sector in the past eight to 10 years, these four or five big players are dominating Indian market--and they're able to set prices for consumers--India has become a sellers' market for steel.
Is it a coincidence that these big steel markets have been dictating prices to the market in the past two years when steel cycle has turned up for the better?
Analysing the supply side of the equation is key for equity investors. The above supply-side analysis may look like a rant, but that is how steel supply got skewed in favour of big steel makers now.
One peculiar thing happened with steel sector on the supply side in the past 12 to 14 years in India. Due to the convoluted provisions of IBC (Insolvency and Bankruptcy Code), four or five big steel makers had cornered five big troubled steel companies referred to NCLT (National Company Law Tribunal) when the steel cycle globally was at the trough--meaning these top steel companies were able to buy big and debt-ridden steel companies (saddled with high debt at that time burdening India's public sector banks) at a cheap price.
It appeared at that time that each big steel company was able to buy one big troubled company--as if they knew which company to buy for their advantage--without any competition from other big players. Due to certain IBC provisions, other players were not allowed to bid for these troubled companies--giving what appeared to be an unfair advantage to these big steel makers.
If you don't believe what I say, please consider the following:
1) Tata Steel took over Bhushan Steel
2) Vedanta Ltd bought Electrosteel Steels
3) ArcelorMittal cornered Essar Steel
4) JSW Steel & Aion Investments bought Monnet Ispat & Energy
5) JSW Steel acquired Bhushan Power & Steel
See five big companies bought five big troubled firms without any inter-biding war by other players. Is it a coincidence that these firms did not compete for other troubled firms? Only private players bought these troubled companies, but government companies, like, SAIL, could not bid for any of them, why?
These big players were able to buy them from troubled government banks at a deep discount (that is, with big haircuts). Ultimately, big steel players benefited at the cost of poor government banks!
As no new capacities were created in the steel sector in the past eight to 10 years, these four or five big players are dominating Indian market--and they're able to set prices for consumers--India has become a sellers' market for steel.
Is it a coincidence that these big steel markets have been dictating prices to the market in the past two years when steel cycle has turned up for the better?
Analysing the supply side of the equation is key for equity investors. The above supply-side analysis may look like a rant, but that is how steel supply got skewed in favour of big steel makers now.
Capex
Moreover, steel companies need huge investments going forward, due to maintenance, expansion and for creating new capacities. This may deter valuations of steel companies going forward. The proposed capital expenditure (capex) for Tata Steel Ltd in FY 2022-23 is Rs 12,000 crore.
Some investors, in general, get attracted to low P/E ratios of metal companies. I doubt whether they can make any money when the business cycle is at or nearing elevated levels.
Moreover, steel companies need huge investments going forward, due to maintenance, expansion and for creating new capacities. This may deter valuations of steel companies going forward. The proposed capital expenditure (capex) for Tata Steel Ltd in FY 2022-23 is Rs 12,000 crore.
Some investors, in general, get attracted to low P/E ratios of metal companies. I doubt whether they can make any money when the business cycle is at or nearing elevated levels.
What low P/E ratio means?
Price-earnings (P/E ratio) is low means most of the positives of the business are reflected in the price of steel companies. You could observe the P/E ratios and other valuation ratios of these companies and find out this for yourselves.
Tata Steel Limited has a huge debt, though the company has reduced it last year. Their total debt as on 31Mar2022 is Rs 75,600 crore with a debt equity ratio of 0.66. Debt level is not comfortable, that too, in a backdrop of rising interest rates globally. However, its cash and cash equivalents are Rs 24,500 crore--which will be a cushion.
Tata Sons (with 34% stake in equity shares) take dividends regularly from the company, even though Tata Steel has been debt-ridden ever since they took over Corus more than 15 years ago. This year, Tata Steel declared a dividend of Rs 51 per share--total outgo will be Rs 6,230 crore (of which, Rs 2,120 crore dividend would go to Tata Sons alone).
Suppose you're a lender to Tata Steel, why would you allow such a high dividend to equity shareholders whatever the reputation of Tata Group is? Bankers have not been asking such questions for their own reasons.
Price-earnings (P/E ratio) is low means most of the positives of the business are reflected in the price of steel companies. You could observe the P/E ratios and other valuation ratios of these companies and find out this for yourselves.
Tata Steel Limited has a huge debt, though the company has reduced it last year. Their total debt as on 31Mar2022 is Rs 75,600 crore with a debt equity ratio of 0.66. Debt level is not comfortable, that too, in a backdrop of rising interest rates globally. However, its cash and cash equivalents are Rs 24,500 crore--which will be a cushion.
Tata Sons (with 34% stake in equity shares) take dividends regularly from the company, even though Tata Steel has been debt-ridden ever since they took over Corus more than 15 years ago. This year, Tata Steel declared a dividend of Rs 51 per share--total outgo will be Rs 6,230 crore (of which, Rs 2,120 crore dividend would go to Tata Sons alone).
Suppose you're a lender to Tata Steel, why would you allow such a high dividend to equity shareholders whatever the reputation of Tata Group is? Bankers have not been asking such questions for their own reasons.
These are the questions equity investors need to ask before making any investments.
But as Tata Group is perceived as a good group, investors don't dare to ask such questions in general. We investors suffer from authority bias--we don't have the gumption to question those in power.
Current investor interest in the stock is stimulated by Tata Steel's decision to go for a stock split of 10:1 (10 new shares for every one share owned).
But as Tata Group is perceived as a good group, investors don't dare to ask such questions in general. We investors suffer from authority bias--we don't have the gumption to question those in power.
Current investor interest in the stock is stimulated by Tata Steel's decision to go for a stock split of 10:1 (10 new shares for every one share owned).
Bottomline:
Bottomline:
Its current market price is Rs 1,284 per share (face value Rs 10 per share) with a market cap of Rs 156,900 crore (05May2022). Short-term investors might gain from the current level depending on China COVID-19 lockdown situation and global developments.
Based on the current high debt levels, current steel cycle supply-demand dynamics and the high ability of the promoters to strip cash from Tata Steel, I would not invest in the stock from a long-term perspective.
(This was written spontaneously by me--sorry if it looks like a rant by a disgruntled fellow who couldn't catch the steel cycle at the last bottom!)
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References:
Anil Singhvi of IiAS Advisory on convoluted IBC provisions - Tweet 24Nov2017
Tweet 27Oct2019 - steel companies and their bidders
Tweet 06Jul2021 - large haircuts in IBC, CIRP
Tweets between 2017 and 2021 on IBC, CIRP, other related things
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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