It has not been the best of times for Tata Steel over the past 6 or 7 years. They purchased Corus (formerly British Steel), intended to be a vital cog in their European supply just before the global financial crisis killed regional demand. They weathered that storm due to demand from their local market India, only for the country to go through a prolonged period of stunted industrial growth a few years later.
In addition to these factors, a slowdown in China has seen excess capacity being dumped as exports to other markets such as India. It comes as no surprise that Tata Steel has seen earnings fall 69% and is an under performer on the BSE Sensex which has posted gains of 34% in the last year.
The worst may be over
It was crucial that Tata Steel fix its loss making European division by finding a lasting solution. In addition to cutting costs and recovering local demand, (this has enabled the European division to post a profit), they have also changed strategy by concentrating on specialty steel for a niche market. Development of Celsius 420 steel, primarily marketed as a time saving, cheaper and lighter alternative in the construction industry is seen as a means to weather economic downturns and keep the division in the black through tough trading conditions. Whether it is a success or not, this change in strategy is encouraging and highlights out of the box thinking.
Tata Steel also bought iron ore for the first time in the company’s history. A series of scams saw the Indian Supreme Court freeze mining activities. This meant that Tata (who owned such mines) were forced to purchase raw materials from the market at inflated prices. The newly elected Modi government is expected to liberalise mining among other major sectors of the economy in the budget, announced on 28th February in addition to providing cover for local producers via import barriers. This will aid in boosting local demand, reduce input costs of iron ore and reduce foreign competition in its home market.
Considering the metal sector stocks on the Bombay and National Stock Exchange are at a yearly low, all the above factors make Tata Steel an ideal candidate for the long punt in anticipation for technological and policy gains. If the Indian budget delivers as expected, returns on investment could be immediate as the market factors in future gains. Compared to other major local competitors such as Jindal Steel, they are better buffered by being part of India’s largest conglomerate, the Tata group. This implies they are a less risky prospect in a naturally volatile Indian market and may provide solid returns in the years to come.
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