TATA Steel Fundamental Analysis and Future Outlook

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TATA Steel Fundamental Analysis and Future Outlook

Tata Steel was established in India as Asia’s first integrated private steel company in 1907. With this, they also developed India’s first industrial city at Jamshedpur. The company established its presence in the European continent after acquiring Corus in 2007. Tata Steel also operates captive mines to maintain cost-competitiveness and production efficiencies through an uninterrupted supply of raw material.

The company’s shares have 52 weeks price band of INR 254 and a total market capitalization of INR 288 billion which makes it a Large-Cap company. The shares have a P/E ratio of 5.37 and a dividend yield of 5.11%

Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.

  1. Economic Moat
  2. Business Model and Management
  3. Growth Ratios
  4. Profitability Ratios
  5. Cash Flow Ratios
  6. Liquidity and Solvency Ratios
  7. Efficiency Ratios
  8. Valuation Ratios
  9. ROE (Du Pont Analysis)
  10. Future Prospects

(All units are INR Millions except ratios and per share data)

You can get the complete excel model used for this analysis from below:

1.Economic Moat (★ ★ ★ ☆)

The company operates in the metals and mining industry where market dominance comes through scale, level of integration, capacity and cost structure. Tata steel operates in an asset-heavy sector which is cyclic in nature. To achieve profitability in such industry low-cost structure is required which involves backward integration, high capacity utilization and even recycling capacities. The company’s annual crude steel capacity across Indian operations is nearly 14+ MnTPA and in Europe the capacity of over 12.1 MnTPA.

The company is the second-largest steel producer in Europe and they have two integrated (blast furnace-based) steel-making sites in Ijmuiden, the Netherlands and Port Talbot, South Wales. Tata Steel has a presence in South East Asia as well through NatSteel Holdings Pte, a wholly-owned subsidiary of Tata Steel. The company is further looking forward through inorganic acquisitions for expansion and increasing its capacity in the near future. This all along with the backing of the Tata business conglomerate gives a wide economic moat to the company. Therefore this category gets 4 stars in Tata Steel fundamental analysis.

2. Business Model and Management (★ ★ ★ ☆)

The business model of the company is such that it operates in 4 major verticals namely Automotive and Special products, Branded products and Retail, Industrial Products and Services & Solutions. The company further has a distributor network of 13,500+ large distributors and a solid intangibles profile with 119 patents filed and 58 patent approvals. In 2018, Tata Steel acquired Tata Steel BSL Limited (formerly known as Bhushan Steel Limited) through its wholly-owned subsidiary.

As one of the largest integrated steel players in India, Tata Steel BSL is a manufacturer of variety of products such as Hot Rolled Coil, Galvanized Coil and Sheet, Galume Coil and Sheet, High Tensile Steel Strips, Precision Tubes, Sponge Iron etc. Tata Steel was also looking forward to merging its European arm with the Thyssenkrupp steel business in Germany but the deal was blocked by the European Commission. The JV would have created Europe’s second-largest steelmaker after Arcelor Mittal by merging the two companies’ operations in Germany, the Netherlands and the UK. This overall shows a diversified business model for the company, but the nature of the industry is still asset-heavy.

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Mr T V Narendran is the CEO and Managing Director of Tata Steel Limited. He has over 30 years of experience in the Mining and Metals industry. Mr Natarajan Chandrasekaran is the Chairman of the board and also of the Tata Sons which is the holding company and promoter of more than 100 Tata operating companies with aggregate annual revenues of more than $100 billion. Overall the management is stable and reflects the values of the Tata group. Therefore this category gets 4 stars in Tata Steel fundamental analysis.

TATA Steel Fundamental Analysis and Future Outlook

3. Growth Ratios (★ ★ ★ ☆ ☆)

The revenue has shown a growth rate of 4.7% CAGR over the last 10 years. The operating income, as well as net income, has been fluctuating over the years. This is because of the increasing operational expenses and cyclic demand. The working capital has been cyclic and the Cap-Ex has remained stable over the years. Therefore this category gets 3 stars in Tata Steel fundamental analysis.

TATA Steel Fundamental Analysis and Future Outlook

4. Profitability Ratios (★ ★ ☆ ☆)

The gross margins have improved significantly due to the increased scale of manufacturing. The profit margins have shown good recovery as well since FY 2016. The profitability of the company was mainly driven by the low cost of raw materials due to backward integration and the new efficient smelters. The Margins will, however, take a hit due to the production loss and reduced demand because of the COVID-19 outbreak. Therefore this category gets 2 stars in Tata Steel fundamental analysis.

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TATA Steel Fundamental Analysis and Future Outlook

5. Cash Flow Ratios (★ ★ ★ ☆ ☆)

The Cap-Ex as a percentage of sales has declined slightly over the years, anyways this will only create over capacity for the company in the coming years due to weakening demand. Free cash flow growth has also gone negative. The net income margin has also shown a slight decline last year. The cash position of the company is also not expected to improve until the demand picks up again once the COVID-19 situation clears. Therefore this category gets 3 stars in Tata Steel fundamental analysis.

6.Liquidity and Solvency Ratios (★ ★ ★ ☆)

The financial leverage has been decreasing along with the debt to equity ratio. The current and quick ratios have also seen stability over the years. This means that the current assets are enough to cover the short term obligations of the company. This overall indicates moderate liquidity and solvency position for the company. Therefore this category gets 4 stars in Tata Steel fundamental analysis.

7. Efficiency Ratios (★ ★ ☆ ☆)

The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.

TATA Steel Fundamental Analysis and Future Outlook

Business efficiency has declined over the years. The inventory days have seen an increase from 169 to 228 days whereas the receivables period has seen a dip from 46 to 35 days. The payable period has remained stable, this overall makes the cash conversion cycle to increase from 55 to 103 days and it still remains positive. So the company will have to finance the additional working capital from outside. Therefore this category gets 2 stars in Tata Steel fundamental analysis.

TATA Steel Fundamental Analysis and Future Outlook

8. Valuation Ratios (★ ★ ☆ ☆)

The company operates in the metals and mining industry and the market also prices such company’s shares in cyclic multiples. When demand recovers the stock starts trading at higher multiples and vice versa. Hence the share price growth is cyclic and not linear such as in other sectors like Banking or FMCG. The future demand outlook is not very optimistic for the metal industry as a whole due to the disrupted supply chains because of the COVID-19 crisis. The earliest recovery is not expected at least until FY 2022. Therefore this category gets only in 2 stars in Tata Steel fundamental analysis.

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9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)

The leverage has gone down over the years and the operating margin has seen a slight improvement. The asset turnover has shown a slight improvement along with the Interest burden ratio. Tax efficiency, however, has been fluctuating over the years. Overall there is no significant improvement in the RoE of the company. Therefore this category gets only 3 stars in Tata Steel fundamental analysis.

10. Future Prospects (★ ★ ☆ ☆)

Some insights for the coming years from the analysis, management discussions and con calls are as follows.

  • The COVID-19 outbreak will have a major impact on production as well as sales of all the metals. Most of the large infrastructure projects have halted across the world along with retail consumption declining especially in the housing sector. The impact is expected to be in double digits for the company in the coming years.
  • Recently Nest-In, the construction solutions brand of Tata Steel, has launched an onion storage solution ‘Agronest’ aimed at reducing onion wastage by half from the current level. This is a big step for the company in smart warehousing and this can have good business potential in the near future.
  • TATA Steel is looking forward to trimming costs in its European business lines and thereby improving profitability. management in the integrated report 2020 that significant market headwinds, particularly in the last two quarters, and the disruptions caused due to the COVID-19 pandemic, have made the issue complex in Europe.
  • The company realised profits of about Euro 370 million in the last financial year due to improvement programmes across its European business.

The company has shown improvement in capacity over the years but not in the financial position. The global demand outlook is also weak in the coming years. The stock price has also corrected significantly but there is not much recovery ahead in the near future. Therefore this category gets only 2 stars in Tata Steel fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:


Therefore it is a 3-star stock

★ ★ ★

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TATA Steel Shares
Economic Moat ★ ★ ★ ★ ☆
Business & Management ★ ★ ★ ★ ☆
Growth Ratios ★ ★ ★ ☆ ☆
Profitability Ratios ★ ★ ☆ ☆ ☆
Cash Flow Ratios ★ ★ ★ ☆ ☆
Liquidity & Solvency ★ ★ ★ ★ ☆
Efficiency Ratios ★ ★ ☆ ☆ ☆
Valuation Ratios ★ ★ ☆ ☆ ☆
ROE (Du Pont Analysis) ★ ★ ★ ☆ ☆
Future Prospects ★ ★ ☆ ☆ ☆
Overall Fundamental Rating ★ ★
TATA Steel Fundamental Analysis

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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)

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