Talk of blessings in disguise.
Analysts and market experts have been having a go at Tata Steel ever since it acquired the UK’s Corus (now called Tata Steel Europe) in October 2006. As Europe went kaput in 2008, Tata Steel’s stock got pummelled to a low of Rs 145 per share in December 2008, off the high of Rs 935 per share in January 2008.
Criticism abounded that Tata Steel was rash in acquiring Corus and harsh in managing its affairs. In the last one year, as the stock attempted a rebound but crashed again (this time 26%, from Rs 408 to Rs 304), the criticism seemed to gather steam anew.
Not any more. The selfsame analysts who criticised Tata Steel day in and day out are now stamping ‘overweight’ or ‘buy’ ratings on its stock. And this, in spite of the company writing off a non-cash impairment loss of $1.6 billion (Rs 8,000 crore) on Monday.
Pray, what gives?
“Europe is still bad and domestic demand is still muted, but what is attractive about Tata Steel is its current valuations,” said an analyst from an international brokerage.
He said another thing that is attractive about Tata Steel is its rising domestic capacity, which is slowly coming close to its European operations.
Essentially, this means its profitable part of the business is growing while the non-profitable part is contracting.
Corus’s capacity in October 2006 stood at 22 million tonne per annum (mtpa), while Tata Steel had a capacity of 3 mtpa.
In the next six years, while Tata Steel consistently increased its capacity to 10 mtpa, Corus’s capacity, which neither had a market to sell or a cost-effective way of sourcing raw material, came down to 14 mtpa, thereby reducing the burden on the parent and opening gates to a better time.
“Sharply growing Indian operations (where Tata’s competitive advantages have widened as almost all its peers have been negatively impacted from regulatory developments) and shrinking European operations should buttress profitability and return ratios over medium term,” said Vipul Prasad and Ritish Rangwalla, analysts with Morgan Stanley, in a note on Tuesday.
They said that while the recent $1.6 billion impairment will hit the share price marginally in the short term, it will eventually lead to an increase in its share price and return on equity by almost 20%, in spite of a tepid domestic market.
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