Tata Steel stock fell for the second consecutive day on Thursday, a day after it outbid Brazilian steel maker CSN to acquire UK’s Corus Steel.
MUMBAI: c The stock closed 1.34% lower at Rs 457.75.
Ever since Tata Steel announced the deal on Wednesday, there has been a feeling that the $12 billion it was paying Corus was stretched. This led to the share falling 10.66% on Wednesday itself to close at Rs 463.95.
The plunge over the past two days makes Tata Steel the second-worst performing stock in the Sensex since October 5, 2006, when the company announced that it was considering an alliance with Corus. It has been down 14.81% since then, just ahead of Hindustan Lever, which is down 17.1%.
While research house CLSA downgraded the stock from ‘outperformer’ to ‘sell immediately’ after announcement of the deal, other analysts seem to be waiting to meet the company management before taking a call on the stock.
“Though the current acquisition price of $710/tonne appears stretched, Tata Steel would acquire tremendous scale with Corus and has a potential to create value in the company in the longer run,” SSKI said in a report.
Analysts are unanimous that the acquisition should not be viewed over the short term. “Post integration, the benefits could be very large. And now, since the deal is through, the Tatas would be more willing to disclose the benefits. Any price increase in steel could flow directly into the bottom line of the company, as a result of which payback (of the debt to finance the deal) could happen much faster,” said Harendra Kumar, head of research at ICICI Direct.
“For the company, it is beneficial as it leapfrogs into another league. It gets access to the new markets and its costs could probably be brought down because of easier access to raw material and economies of scale,” said Tarun Sisodia, head of research at Anand Rathi Securities.
However, Sisodia says that for investors in Tata Steel shares, the bid looks very aggressive from a short-term perspective. “Anything beyond 550 pence a share is expensive and EPS negative. The benefits will come from integration, which will happen only in around 3 years. But since we’re at the peak of a commodity cycle, I may also say that the view should be longer, since steel prices are not expected to move up further from here,” he said.
A steel analyst from another domestic broking firm added, “On valuation and earnings, the price looks expensive, but as a replacement cost (the cost that Tata Steel would have incurred were it to build 19 million tonnes of additional capacity), it looks reasonable.”
Though the top five steel makers account for just 19.15% of the world’s 1.2 billion tonne per annum market, analysts say any consolidation would bring better pricing control. “One would have to wait and see how much this consolidation would add to the pricing power. If it adds significantly, then the steel sector could get rerated,” said Kumar.
A steel company typically trades at a price to earnings multiple of 4-10. Tata Steel’s P/E stands at 7.4.
Sisodia of Anand Rathi begs to differ: “The market dynamics in commodities is such that it’s difficult to dictate pricing” he points out.
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