Recently, Moody’s has changed the outlook for Tata Steel from ‘Stable’ to ‘Positive’ which means the firm is optimistic about the Tata Steel business and does not find any uncertainty currently. Also in FY22, Tata Steel was the most profitable company in the Tata Group and posted a Net Profit of Rs. 41,100 Cr. So, let’s discuss company performance and its prospect in this article as we move ahead.
Moody’s Upgrades Tata Steel’s Outlook to Positive:
- In FY22, Tata Steel surpassed Tata Consultancy Services (TCS) in terms of profit generation by recording a profit of over Rs. 41,000 Cr.
- In the past, a common mistake which was being made by Steel Companies during the upward cycle of the steel sector was raising debt for CAPEX and other activities which further leads to poor debt management when the cyclicality in the sector arrives.
- The positive thing Tata Steel did here was not raising substantial debt in FY22 and also is planning to reduce debt worth Rs. 7,500 Cr. to Rs. 7,700 Cr. in FY23.
- As of March 31, 2022, the gross debt of Tata Steel stands around Rs. 75,000 Cr., while the net debt of the company is around Rs. 51,000 Cr., implying that around Rs. 24,000 Cr. Cash & Cash Equivalents are available with the company as of date.
- If we go back to the debt levels of FY20, then the debt of the company was around Rs. 1,16,000 Cr., while the net debt of the company was Rs. 1,04,000 Cr. Currently, the net debt is down by around 50% to Rs. 51,000 Cr.
- The EBITDA Per Tonne was Rs. 6,000 in FY20 to Rs. 21,626 per tonne in FY22 which was basically on account of rising steel prices.
- Also, the interest coverage ratio of the company which was earlier ranging between 3.9 to 4.1, now has shot up to around 11 times. Interest Coverage Ratio (ICR) can be calculated as EBITDA/Interest Cost. Generally, the higher the better it is considered for the company.
- The Net Debt to Equity ratio of Tata Steel is at .52, which was 1.42 times, two years back which is a positive sign for the company.
- Also on account of the rising EBITDA per tonne of the company, the Net Debt to EBITDA figure is at 0.80, which can increase with the upward cycle of the steel sector cooling off.
- From an industry viewpoint, there is robust demand for steel across the globe whether it is in Asia or Europe.
- The global supply chain issues are also settling with time, and the raw material prices like Coking Coal, iron ore, etc. might remain range-bound. Here, specifically in Europe, the power cost of steel production is on the higher side as Europe has sanctioned oil & gases from Russia, leading to rising fuel and energy costs for the company. Tata Steel is highly benefited here as it is having own mines of Iron Ore.
What Should Investors Do?
Recently, the stock price of Tata Steel has a downward phase where it was almost down by 40%-45%. The stock is having Price to Book ratio is 0.93 times, while the Price to Earnings (P/E) ratio is quite low at around 2.7, but one should understand that Tata Steel cannot post such huge profits as it was mainly owed to Upward Cycle in the steel sector. Hence, one should keep this stock on the radar but should be cautious while investing in these cyclical stocks.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.