Sunday, August 02, 2015

Tata Steel Ltd: One Should Not Try To Catch a Falling Knife

Tata Steel Ltd could fall further as more and more cues are suggesting that China the world's second largest economy and the largest consumer of base metals is headed for a slowdown. 

Moreover, Narendra Modi government is yet to bring up policies which could shore up the bottomlines of the steel companies in India. 

In fact hereto, the Narendra Modi government has done precious little to stem the tide of steel-imports, from China, South Korea, Russia, etc. 

Most of the leading steel companies are reeling on deep debts. For example, as on end-March, Tata Steel’s consolidated net debt was Rs.69,000 crore. That of JSW Steel was Rs.36,000 crore. 

What is interesting in the case of JSW Ltd is that, despite consistently rising revenue and operating profit, the company has not been able to significantly cut debt. On the other hand Tata Steel, the country’s oldest in the sector, has taken timely non-cash impairment charges, sold non-core assets and even refinanced its loans.

India's steel imports had jumped around 70% to over 9 million tonnes in the year to end-March, with a surge of cheaper purchases from China accounting for about a third of the total. Imports soared 55% in April-May. 2015. After months of lobbying by its largest steelmakers, India last month raised duties on some steel imports by up to 2.5%--which is too little and too later. 

Also, the Narendra Modi government is in dilemma as regards steel imports and more duty increase could potentially harm the bottomlines of smaller producers according to a report published in the Reuters. The analysis says that:

"Steps by India to protect its large steelmakers from a flood of cheap imports could end up closing scores of small, local firms that process the metal, industry analysts and executives said. These processors currently buy imported steel at up to 20 percent below India's pricier, domestic steel, turning it into finished steel products for industrial use".

This has virtually left very options for the Modi government, to protect the larger domestic players in the steel sector. 

Meanwhile, there some news in the media that Tata Steel Ltd may be forced to further reduce assets in its Europe business, hurt by continued challenges due to adverse currency volatility and surging Chinese imports in India. Tata Steel Europe has already put its long products business on the block and is narrowing down its focus on more profitable and promising business divisions in Europe like its strip business while moving away from continuously loss-making units.

However, some smaller steel companies, who are taking new initiatives, like Rohit Ferro Tech Ltd (Rs.6.53), could see some improvements in their share prices.  
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