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Thursday, January 20, 2011

Tata Steel FPO

After six years, Tata steel is again hitting the secondary market.
Tata FPO, price band is 594 INR to 604 INR, while today stock closed at 632.5.
Average ‘price to book’ and ‘price to earning’ for this price range comes out to be 1.45 and 7.7 respectively.

The factor which gives Tata steel over  competitors is its self sufficiency in procuring ...iron ore through its captive mines.
Coking coal which is an important ingredient for steel manufacturing and the company is 60% self reliant for the same.

Tata steel has also signed an agreement to establish a 50:50  joint venture company for coal mining in India.

Now coming to fundamental:
Tata steel has a market cap of 57,000 crore. It has reserves to the tune of 36,281 crore.
Company at current valuation gives dividend yield of 1.26% which is nearly one third of Saving bank interest return, nothing intriguing.
The stock was very attractive in second half of 2008, where it was giving around 11% of dividend yield.

Other profitability ratios like RONW,ROCE,ROE are constantly reducing since FY 2006.
Another point which is worrisome is interest coverage ratio which is constantly reducing since 2006, which the year when Tata steel acquired Corus in all cash deal.

If interest prices soars further, this shall put more stress on debt repayment capabilities.
Despite all this, retail investors shall not get 5% discount in the issue, which they get in issues of PSU shares, so there shall not be significant listing gains for retail investors.
So morale of the story is, valuations of this issue are stretched and stock could be accumulated at much lower price in secondary market; which shall also give ‘margin of safety’ to the investor, so those with short term view should avoid this FPO.

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