Why Tata Steel Shares Look Attractive At The Current Levels?

Investment

oi-Sunil

By Sunil Fernandes

Published: Thursday, October 8, 2015, 8:57 [IST]

Metal stocks have melted in the last one month on worries over growth rates in China. In fact, several of them have slumped to recent 52-week lows with most of the shares seeing declines of more than 100 per cent from 52 week highs.

These include Vedanta, Hindalco and Tata Steel. However, most of these shares look over valued at the current levels, barring Tata Steel. There has been some recovery in metal stocks in the last few days. Here are some reasons why Tata Steel shares look attractive at the current levels.

China growth rates over exaggerated

A fall in Chinese growth rates has been over exaggerated. Stocks that are closely related to the China growth story have fallen off the roof. These include metal names as well as stocks like Tata Motors. However, Tata Steel looks attractive at the current levels, as China will continue to be the world's growth engine in the coming years.

The government there has enough tolls to keep chugging along.

Import duty on steel products

In order to curb cheap imports of steel products the government recently placed anti dumping duty on steel. A duty of $309 per tonne has been imposed on imports from China, while $316 per tonne duty has been fixed for Malaysia and $180 per tonne for Korea. This augurs well for players like Tata Steel to protect their margins.

Domestic demand will remain robust

Demand from the domestic industry will continue to be robust. The government's on going focus on infrastructure, will give a boost to the performance of Tata Steel. For example, the government's emphasis on smart cities is likely to provide a thrust. With economic activity set to gather pace, expect recovery for steel products.

Expansion on track

Tata Steel is implementing a capacity expansion, wherein it is enhancing its domestic capacity by 3 MT from 9.7 MT currently to 12.7 MT. This is to be commissioned in the second half of FY16E.

The new plant at Kalinganagar, Odisha is within close proximity of the rich mineral belt. Expansion in the higher margin domestic business augurs well for the company as sales volumes from Indian operations would steadily increase in the coming years. This could boost earnings in the next 2-3 years, which could benefit the stock in the medium to long run.

Cheap valuations

Tata Steel is expected to report an EPS of around Rs 23 by FY 2016-17. This would make the price to eranings ratio at around 10 times, its current stock price of Rs 232. The company also maintains a healthy dividend taking the dividend yield itself to 3 per cent.

The stock should do well in the coming years.

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