Equity Research: Tata Steel

Priyanshi Jain

The approach in this report is to first give my recommendation for the Tata Steel stock and then dive into the factors
for giving the recommendation. I looked at the steel sector, the stock & financials and other macroeconomic trends

Recommendation on Tata Steel

A systematic investment plan (SIP) can be started given an overall improving trend in the steel industry and the
strong position held by Tata Steel. A lumpsum investment is NOT recommended at this time owing to an expected
market correction due to high inflation and low FD rates (when FD rates are increased, typically the market falls and
corrects itself). The idea would be to invest a lumpsum amount when the market corrects.

Deep Dive on Recommendation

1. Bullish on the steel sector post demand recovering in China and globally as covid restrictions are slowly
removed.
2. Strong fundamentals shown by Tata steel with reducing debt, increasing dividend payouts, low P/E
compared to the industry average, targeted acquisitions and a sound management. Over the course of the
lockdown, Tata Steel under TV Narendran was revitalized with a very sound strategy to deleverage and
generate free cash flow without ‘expanding’ their balance sheet.
3. FD rates are lower than inflation (in the US as well as India) which typically signals to a increase in FD rates
historically. Whenever this happens the market corrects itself with investors withdrawing and putting some
money in FDs as well – given this, the idea is to wait and not invest a lumpsum in Tata Steel and do that only
once the market corrects (read – falls).

Steel Sector Analysis

Overall, the steel and metal industry looks to be on the uptick with help from govt. initiatives, overall rising metal
demand post covid, and low cost of labour in India

For the overall metal sector we saw Covid induced correction, followed by a sharp recovery. The extent of correction
and the V-shaped recovery can be gauged from the fact that while Q1FY21 witnessed ~Rs6,000/te EBITDA for Tata
Steel, it can very well be ~Rs18,000- 19,000/te for Q4FY21.

A second key factor in the metals industry is the Chinese demand outlook, which improved. Chinese steel demand
continues to surprise all through the year (even in November). Despite 12-13% production growth, there has hardly
been any increase in exports. Consensus demand estimates for CY21 stands at 4-5% YoY, which is impressive given
the base of CY20.
Following is an excerpt from IBEF:
Following are excerpts from Tata Steel Annual Report 2021
Tata Steel Summary & Current Performance

Backward integration
Having its captive mines for the key raw material, iron ore is the biggest advantage and helps the company manage
through difficult times. In good times, it helps company in increasing margins, as happened in Q4 of FY 21.

Strategic Acquisitions
Tata Steel is interested in acquiring state-owned Rashtriya Ispat Nigam Limited (RINL), the company's Chief Executive
Officer (CEO) and Managing Director T V Narendran said.
RINL, under the Ministry of Steel, owns and operates a 7.3 million tonnes plant in Visakhapatnam, Andhra Pradesh. It
holds the distinction of being India's first shore-based integrated steel plant.The Cabinet Committee on Economic
Affairs (CCEA) on January 27, gave its ''in-principle'' approval for 100 per cent disinvestment of government stake in
RINL, also called Visakhapatnam Steel Plant or Vizag Steel, along with RINL's stake in its subsidiaries/joint ventures
through strategic disinvestment by way of privatisation. Since RINL is located on the eastern coast of India, the
acquisition will give Tata Steel more access to the South East Asian markets -- where the company already has
presence -- besides catering to the domestic needs of special steel through rail and road.

Key factors
China is the largest producer and consumer of steel. Any dip in Chinese demand pushes the global steel prices down
sharply. Chinese macro numbers, especially PMI are an advance indicator of what might happen to steel stocks.
After recent spike in steel prices, user industries like construction and automobile raised voice of concern. Will
government intervene to tame rising prices? Needs to be watched closely.
KEY METRICS  EPS – TTM ( ₹ ) 172.85  PB Ratio (x)0.06
 PE Ratio (x) 7.96  MCap ( ₹ Cr.) 1,65,640  Div Yield(%) 1.82
Peer Analysis

Key Financial Metrics W.R.T Peers

2. We see two major players driving the steel business – both have backward integration

JSW Stock Price over the last 6 months

Trends
Thus, we see an overall increasing trend quarter on quarter with the company also actively working on reducing the
overall debt. Their strategic acquisitions also enable them to be competitive in the industry. Their P/E is also lower
than the industry average and with a positive beta, they are expected to outperform an already bullish market.

FD Rates vs Inflation
Year 2021, deposit rates are set to go up by the second half
In 2020, the Reserve Bank of India's (RBI) measures were targeted to keep the policy rates down throughout the
year, extending into 2021. It also announced measures to infuse liquidity in the banking system to be able to provide
affordable financing and hence, support economic growth. Extra liquidity also kept interest rates down. On the other
side, bank credit offtake was low, as banks adopted a cautious stance towards lending across all sectors of the
economy. Low credit offtake meant lower demand for funds by banks/lenders and hence, lower rate of interest on
deposits.
Global firms and experts have already started questioning the ability of RBI to continue with its accommodative
stance along with trying to achieve its macro-economic targets for inflation and fiscal deficit. All macro-economic
indicators together point towards an inevitable rise in deposit rates starting from the second half of the FY 2021-22.
Till then, depositors should keep their money parked in shorter tenure FDs (i.e., tenures of less than one year) to
retain the flexibility to shift their savings to higher rates once the rates begin their upward journey.

Given this scenario, some of the banks and NBFCs have already started inching up the FD deposit rates (March 21’
onwards) – this would mean right now investors are incentivized to keep money in the stock market or short-term
FDs and then switch over to long term FDs post the increase in the deposit rates.
Thus, the recommendation is to hold on to liquidity with the market expected to undergo correction and invest the
lumpsum amount post said correction.