Posted on 23 Feb 2010
Tata Steel shares have more than tripled in the past year, in line with the sector index .BSEMET, but way ahead of a doubling in
Several brokers have upgraded the stock after consolidated quarterly earnings last week, saying surging demand in
Others, however, say rising costs of raw materials such as iron ore pose a risk to valuations.
The market looks evenly split. Of 34 analysts covering Tata Steel, 16 rate it a 'buy' or 'strong buy', according to StarMine, a Thomson Reuters company, while 11 have it as a 'sell' or 'strong sell'.
HOT STEEL
"Management's guidance for recovery in
Corus contributes two-thirds of Tata Steel's total capacity of about 30 million tonnes, and operating profit there, at around $37 a tonne, is already much better than expected, he said.
The Indian operations, which make up a quarter of capacity, have posted double-digit demand growth for several months and higher steel prices and capacity expansion will be key levers to boost future earnings, analysts said.
"Tata Steel India will benefit if steel prices go up because they own most of their raw material supplies here," said Pawan Burde, vice president at PINC Research, who has a 'buy' rating.
Most brokers see another 25 percent rise over a 12-month period, and the stock could see a 5-10 percent upside by March.
"The company should show more consistent profitability now as it starts to benefit from restructuring programmes and a better product mix," Burde said.
COST WOES, RICH VALUATION
Some analysts, though, say the stock is pricy versus its peers, and are not convinced Corus is firmly rebounding yet.
"The valuations are not justified if you compare to global or Indian peers," said Niraj Shah of Centrum Broking. "ArcelorMittal has made operating profit of $105 a tonne in the last quarter, but Corus has only made around $35 a tonne."
Tata Steel trades at 10.8 times forward earnings, higher than Asian peer POSCO at 8.8 times, but lower than Baosteel's 13.1 times.
Shah, who has a 'sell' rating, has a 12-month price target of 453 rupees per share -- more than a fifth lower than the current 572 rupee share price.
"Long-term contracts have not yet been crystalised, but raw material prices are moving up," noted Manish Sonthalia, fund manager for portfolio management services at Motilal Oswal, who oversees $190 million and has advised clients to avoid the stock.
"Higher costs would weigh on the company's profits in the near term if steel prices don't move in tandem with raw material prices," he said.
