Tata Steel: Will Warren Buffett buy this stock when it is in trouble?

20 Jul

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” – Buffett
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” – Buffett

Think long-term
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
Here are some of the headlines in last one week;
Tata Steel Europe reports record GBP 1.2 bn loss – Economic Times
Cyrus Mistry forecasts challenging two years for Tata Steel – the Mint
Losses widen at Tata Steel Europe as demand drops – Wales Online
See Lower Levels in Tata Steel. – Analysts
Tata Steel down 4% as Europe arm report GBP 1.2 Bn Loss
Tata Steel – Beware of low valuations – Money Control
JP Morgan sees over 85% upside in Tata Steel – Economic Times
Tata Steel hits 52-week low as CLSA downgrades to ‘sell’ – Economic Times
Next two years will be challenging for Tata Steel, says Mistry – The Hindu

The Tata Steel stock price has slid in the year till date because of the company’s high net debt, which is over Rs 60,000 crore, on which it has to pay an interest of close to 7%. In FY13, Tata Steel paid a total interest of Rs 4,000 crore on total earnings before interest, depreciation and tax, or EBIDTA, of Rs 5,400 crore. What this means is that almost 3/4th of its EBIDTA was used for just interest payments.
For investors, it may well be tempting to buy into a Tata group stock which has corrected by 40% in the last six months and is trading at below its book value. But given the concerns relating to the steel maker’s ability to service its huge debt and no clear signs of improvement in earnings, it makes sense now to steer clear.
Global steel demand continues to be weak. Steel prices have corrected by 8-10% since FY14 beginning due to weak demand, especially from Europe and China.
Only a few analysts has recommended buy to a blue-chip stock like Tata Steel with a revised target of 325. Tata Steel delivered robust volume growth from its Indian operations in FY13 on the back of commissioning of new facilities at the Jamshedpur plant. We, however, believe the growth momentum will not be sustainable, going forward, on the back of subdued domestic demand scenario. Hence, we downward revise our sales volume estimates from
Tata Steel India is expected to report EBITDA margin of 29% in FY14E and 30% in FY15. However, at the group level, as per our revised estimates margins are expected to decrease by 20 bps to 10.3% (from 10.5% earlier) in FY14E & 30 bps to 11.9% (from 12.2% earlier) in FY15E.
While there has been no change in the operating environment of the company, JP Morgan’s European Steel analyst, Alessandro Abate, has highlighted potential price increases of 20 euro/tonne in Europe, taking Northern Europe steel prices to 460/tonne. Globally, scrap and iron ore prices are inching up. The uptick in steel prices in Europe is positive for Tata Steel. “In our view, the worst of the operating environment in Europe and India is behind Tata Steel. The balance sheet is unlikely to deteriorate as some fear on the upcoming 6MT Odisha project, as the India operating cash flows can service large part of the capital spend. Tata Steel is likely to look at rationalizing its global footprint further, which we believe the markets are not factoring in,” the report added.
According to the report, current valuations (below P/BV) offer attractive risk reward to investors. The weak local steel demand is not as much a drag on Tata Steel’s operations as some fear given the company’s product mix, lack of steel production growth in India from other capacities and the weak rupee.
“Our Jun-14 price target is Rs 530 based on SOTP and we value the India operations at 6.0x, 5.0x for Asia and 5.5x for European operations FY15E EBITDA,” the report added.
Key risks include sharp decline in India profitability, weakness in steel price and decline in European demand.

Company Profile;
Established in 1907, Tata Steel is among the top ten global steel companies with an annual crude steel capacity of over 28 million tonnes per annum (mtpa). It is now one of the world’s most geographically-diversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries.
The Tata Steel Group, with a turnover of US$ 24.82 billion in FY 2012- 2013, has over 81,000 employees across five continents and is a Fortune 500 company.
Tata Steel’s vision is to be the world’s steel industry benchmark through the excellence of its people, its innovative approach and overall conduct. Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency.
Tata Steel’s larger production facilities include those in India, the UK, the Netherlands, Thailand, Singapore, China and Australia. Operating companies within the Group include Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel, and Tata Steel Thailand (formerly Millennium Steel).

We at Best Investment Idea do not recommend any stock but only share the analysis so that you can take the right decision. Feel free to write to us in case you require any report or let us know what you want to read at our blog.
Happy Investing!

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Posted by on July 20, 2013 in Uncategorized


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