Inability of Tata Steel to turnaround the European operations or sell it fully has been in the forefront among the various issues emerging out of the corporate battle between Cyrus Mistry and Ratan Tata. And why not? After all, the company has cornered second largest share of 25 per cent in the total capital employed by 15 listed Tata Group of companies and also had largest share in the total debt as on March given the data provided by Capitaline.
But the company’s return on capital employed plunged to roughly 4-5 per cent in FY16 according to various analysts’ estimates compared to 14-15 per cent in FY11.
Tata Steel’s market cap has declined close to 50 per cent in a span of five years (between FY11 to FY16). But the stock has recouped most of the losses with market capitalization up 25 per cent in April to October itself (compared to 11 per cent gains by the Nifty 50) thanks to rally in metal stocks (NSE Metal up 38 per cent).
Mutual Funds have more than doubled their stake in the company between FY11-FY16 period and further in September 2016 quarter. From 3.67 per cent in FY11, their shareholding in the company almost doubled to 6.29 per cent in March and further to 9.02 per cent in September 2016 quarter.
The company’s stock looks the most overrated one in the group today given decline in returns compared to surge in the stock price. An analyst who did not wish to be quoted pointed out that government’s import restriction measures (minimum import price), improved spreads in European business (sustainable over the next two-three quarters) and efforts to cut down losses in European business (by selling a portion of it) reignited hopes of a turnaround in the prospects of the company.
Tata Steel’s valuation could correct as concerns like price pressure on account of supply outstripping demand in the domestic market, rising coaking coal prices, global oversupply situation affecting residual European operations and delay in deleveraging the balance sheet have emerged. Most analysts are negative on the stock.