Looking at the chart, time & price action suggests that Tata Steel (CMP: 305) has good support zone around 300-290-280. Sustain below 280, it may further fall to 265 & consecutive closing below 265, it may further fall to 259-240-233-210- 200-193 zone in the worst bear case scenario.
On the upside, Tata Steel has to sustain above 307-312 for an immediate to short term target of 320-325 & 335-341-347-355 area. In the mid term, consecutive closing above 341-355 zone, it may further scale 370-380-390-400-420-435 area. In the long term, only sustain above 435. it may target 535-585-605 territory under the bullish market scenario (FY:16-17).
In brief, for Tata Steel, 285-300 may be a strong demand (support) zone & 341-355 & 420-435 might be strong supply (resistance) zone in the near to mid term.
Bottom Line: Technical Trading Levels (Positional)
| SL</>2 | FROM SLR | |||||||||
| TATASTEEL | CMP | 305 | ||||||||
| T1 | T2 | T3 | T4 | T5 | T6 | T7 | SLR | |||
| Strong > | 290 | 285 | 300* | 307-312* | 320-325 | 335-341 | 347-355 | 370-390 | 400-435 | <280 |
| Weak < | 280 | 265* | 259 | 240 | 233 | 210 | 200 | 193 | >290 | |
Tata Steel under performed the broader market by a substantial margin since the last few weeks after its worst than expected Q4 loss (amid one time exceptional UK assets write off ). The domestic operations were also largely affected by disruptions of iron ore supply in India & subsequent increase in cost of productions and further aggreviated by pressure on realisations fulled by cheap imports from China, CIS & Japan/Korea (FTA countries) etc. Further, industrial disputes & threat of looming strike in its UK plants also dragged the scrip to its recent low after breaking its key technical support level of 310-307.
(http://asisjpg.blogspot.in/2015/05/tata-steel-q4-result-below-expectations.html).
But the company is in the process of various steps & using it's leverages to correct the situations, which may yield visible result in the next few quarters/H2-FY-2016. Tata steel has started slew of steps including using its stock of imported iron ore and has also started mining of its own iron ore.
Expected shipments from Kalinganagar steel plant will aid its bottom line/EBITDA (it may diversify its client base into oil & gas sector also for better margin realisations) and the EU operations is showing sustained & better performance on the back of gradual recovery in global economy.
The scrip bounced back few days ago from its recent low on the back of some positive news flows like increase of import duty by around 2.5% on steel imports (although it may be too little & too late), suspension of proposed strike in its UK plants (till July-24) by its workers there & expected permanent solution/reconciliation of its pension issues.
Also there is news of its proposal for setting up of SEZ in Gopalpur (Odisha) to attract global electronics & electrical component makers, specially from China and defence sector manufacturers. The land may not be an issue there, as Tata Steel has already acquired the same for a steel plant back in 1990s, which is eventually shifted to Kalinganagar and is due to commissioned soon. It will set up a new company (Tata Steel SEZ) and the expected capex will be around Rs.2500 cr for developing infrastructure in the SEZ of 2970 acre. Tata Steel itself will invest around Rs.800 cr for setting up of a ferro chrome plant there for the defense sector. Considering the interests shown by Chinese investors & proximity of the Gopalpur port, this SEZ might be a profitable venture for Tata Steel in the coming years. It is also planning various options of getting involved in operating the Gopalpur port in partnership with other companies.
As par market talks, Tata Steel may be also exploring the idea of taking over the ailing Electrosteel (ECS) for a ready made green field project of 2.5 mtpa Chinese steel facility at Jharkhand along with an iron ore mine for around Rs.10000 cr (equivalent of ECS gross debt). The move may be positive for Tata Steel as it is value accretive & time savings. But there is demand (low) supply (high) mismatch in the steel industry at this point of time.
Although resumption of captive mining is a reason for cheer, comparatively higher effective mining taxes of around 79% will hurt the steel industry, thanks to new MMDR Amendment Act. No doubt. our Govt has to reconsider this abnormal mining tax for the sake of ailing industry.
Tata Steel's massive consolidated net debt of around Rs.71000 cr may continue to weigh on its finances. Its now nearly a decade, it bought Corus with $12 bln that has delivered practically nothing and ultimately facillity/assets had to be sold or mothballed amid no visible signs of sustainable turnaround. But the company is actively considering various options to de-leverage some of its loss making EU assets (long products) and streamlining the whole EU operations. Also weak EURO hurting the overall EU operations, specially in UK. But the company is focusing on high margin premium steel segments (flat products) & pace of new launches there.
The company is expected to cut its overall capex by around 25% to around Rs.10000 cr in FY-16 from Rs.13500 cr in FY-15. Also it has already refinanced its $7 bln international debt almost 15 months ahead of schedule of its repayment which has helped to de-risk its balance sheet to a certain extent. Another headwinds may be its $4 bln investments in Kalinganagar plant (1-st phase @3mtpa), which may be proved to be un-remunerative & negative ROE in the short term at project cost of $1300/tonne.
No doubt, next few years could be quite challenging for Tata Steel as far its highly leveraged balance sheet is concerned. Although, being a part of TATA group, refinancing may be not an issue for it going
forward, but what matters is its ultimate bottom line (net EPS) & sustained profitable venture/operations along with fast de-leveraging of of its loss making EU assets.
Going forward, the company is looking for initiatives like smart cities, industrial corridor, metro projects along with "Make In India" concept which will translate a real visible uptick in domestic steel demand in the days ahead. Thus improvement in overall economic activity & resumption of various stalled projects in construction & infrastructure in "Shinning India" might be a game changer of steel industry, including Tata Steel.
Also, China, being the real "growth engine" of the world, may indulge in various targeted mini stimulus there from time to time to arrest its own slowdown. China also has ambitious plan to rebuild the ancient "silk route" trade/economy by building massive infrastructure (High Speed Train & Roads) through India/Pakistan-POK/Bangladesh/Bhutan/Burma etc. Clearly, China is looking far to east & other countries, right from Russia to build rail & road infrastructure to expand its own business by investing trillions of dollars as it is nearly reached a saturation point as far its own GDP is concerned and this will definitely help steel industry as a whole.
Also, there is market talk that PBOC may act shortly over this week end to cut rate again to arrest falling Chinese stock market, which might help the overall market (including metals) apart from the epic Greece saga.
As par quick BG metrics, the current median valuation of Tata Steel may be around 405 (stand alone basis without one time exceptional loss) and projected fair value might be around 450-500-575 (consolidated; FY:16-18) under the current market parameters.
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | LONG TERM | SHORT TERM | MEDIAN VALUE | 200-DEMA | 10-DEMA |
| TATASTEEL | 66.3 | 695.9 | 7.25 | 427.57 | 383.19 | 405.38 | 380.33 | 305.47 |
| TATASTEEL | 82.8 | 751.7 | 7.25 | 477.82 | 428.22 | 453.02 | 380.33 | 305.47 |
| TATASTEEL | 103.5 | 811.6 | 7.25 | 534.22 | 478.77 | 506.49 | 380.33 | 305.47 |
| TATASTEEL | 129.3 | 876.5 | 7.5 | 607.31 | 544.27 | 575.79 | 380.33 | 305.47 |
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