Tata Steel Limited is part of Tata Group, One of India’s most respected business houses. The company has grown from largely a domestic steel manufacturer and is attempting to extend its global footprint mainly through the CORUS acquisition in the UK. As of March 2012, the geographical spread of revenue is as follows
The company derives only 27% its revenue from India and derives around 73% of its revenue from overseas operations. The economic environment in Europe has clearly affected the calculations of the Management in terms of the capital employed on the overseas acquisition and the return on capital expectations. Profit before tax margin has fallen to 6.28% in 2012 as compared to 9.95% in the previous year.
Key Financial Highlights. (crs)
Profit and loss account
Balance sheet ( crs)
Long term trend analysis of the Indian operations for extrapolation may not be a reliable indicator due to a substantial overseas acquisition made in the recent past. The stock is trading at Rs 304.85 on April 26 2013 which translates into a market capitalization of INR 29607 crores. At current price of Rs 304.85, the stock is quoting at a P/E of 5.26 times on a March 2012 EPS of 54.28. Quarterly results published till Dec 2012 indicate a further pressure on margins and indicating a lower EPS for FY 2013. The current discounting is clearly showing the pessimistic view of the investing community in respect of cyclical industries especially metals. The stock of Tata Steel is closely linked to the fortunes of the World economy and is likely to see downward levels on a fundamental basis till a clear view can be taken on the economic recovery of Europe.
At this juncture, it might be appropriate to have a look at the technicals of the stock to check if the charts are in agreement with the fundamentals.
Key Technical comments
- The stock is trading below the 200 day moving average (green) which means that though long term trend has been bearish for a long period of time..
- The stock is trading below the 50 day moving average (red) with a declining 50 DSMA indicating that the intermediate trend is down. The intermediate trend will turn positive only above 335.
- The stock could continue to seek lower levels in the immediate future due to a negative technical position.
- A bearish triangle pattern breakout was completed in Feb 2013 near the 380 levels which will now act as resistance (black line).
- A review of our neutral technical stance will be warranted on a closing above Rs 420/440 zone where there is rising trend line resistance. The trend after such an event will change the trend to bullish.
What’s not so good?
A factor which can go against this investment is the possibility of an extended economic recession in the Euro zone from where the company derives more than 60% of revenue. This could lead to a situation where the company cannot generate sufficient operational cash flows to achieve a satisfactory return on capital employed.
The technical position is also negative with the stock trading well below the 200 day moving average and showing no signs of building a base. It would be better to see a closing above the 200 day MA before investing.
To invest, or not to invest?
Though the stock enjoys a very good pedigree, we feel that there are several concerns on the macro environment which calls for caution. We feel that this stock is suitable only for longer term and risk averse investors with a definitive holding period of greater than 3 years and can be bought in the price range of 225/250 INR compared to current market price of INR 304.85.The stock is part of the NIFTY with good liquidity.
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