The Tata Steel stock has declined almost 16 per cent since January, mainly due to the deterioration in the high-margin Indian operations in the recent December quarter.

The Indian business is, however, expected to show improvement in the coming quarters. Investors can, therefore, buy the Tata Steel stock. At ₹343, the stock trades at a reasonable 0.7 times the company’s estimated book value per share for 2015-16, below the five-year average valuation of 1.2 times.

Improvement expected

Tata Steel, which operates in India, Europe and South-East Asia, derives close to 30 per cent of its revenues from India. For the nine months ended December 2014, the standalone (India business) net profit was ₹5,625 crore as against a consolidated profit of ₹1,749 crore.

Unlike most other steel manufacturers, Tata Steel meets its entire iron ore requirement in India from its captive mines, which gives it a cost advantage. However, with mine closures affecting supplies, the company’s operational performance took a hit in the December quarter.

Following a Supreme Court order, the mines were shut down last year after they were found to be operating under deemed extension (after the end of their first renewal period of 20 years).

Hurt by higher raw material costs, operating profit per tonne of steel (EBIDTA/tonne) in India declined 39 per cent to ₹9,294 in the December quarter compared to the year-ago period.

Most of these mines have resumed operations since December ‘14-January ‘15.

This should provide relief on the raw-material cost front.

Higher realisations

Tata Steel also stands to gain from an expansion of its value-added products portfolio. It is expected to commission the first 3 million tonnes per annum (mtpa) phase of the 6 mtpa Kalinganagar plant in Odisha by mid-2015. The upcoming plant will cater to the demand for high-value flat steel products from sectors such as automobiles, thereby boosting sales volumes and realisations.

While the overall domestic demand for steel remains weak, Tata Steel has managed to grow volumes, particularly of value-added steel products in the December 2014 quarter.

Financial performance

Impacted by lower realisations and higher costs at the Indian operations, Tata Steel’s operating profit (EBIDTA) fell 23 per cent at the consolidated level in the December quarter. Net profit too contracted almost 70 per cent to ₹157 crore. Debt-to-equity ratio (consolidated) stood at 1.4 times as on September 2014.

Going forward, improvement in the availability of domestic raw materials and the weakness in global commodity prices should support profitability. Domestic demand should also improve as the economy gains traction.