In m-cap terms, Tata Steel now second-biggest titan of group companies

Amid a sharp rally in the stock, the steelmaker overtakes Titan after a gap of nearly 6 years

Tata Steel’s stock price and market capitalisation (m-cap) continue to break new ground as investors bet on the spike in the company’s profits in the forthcoming quarters.
 
On Monday, the steelmaker overtook Titan Company to become the second-biggest in terms of m-cap among Tata group companies, after Tata Consultancy Services (TCS). At the end of September 2020, it was ranked fifth in m-cap among group companies, after TCS, Titan, Tata Consumer, and Tata Motors.
 
Titan — a relatively smaller company in terms of revenues and assets — first overtook Tata Steel in terms of m-cap in March 2015.
 
Historically, Tata Steel has always been among the biggest companies in the group in terms of m-cap, revenue, and profit but its fortunes began to decline after 2010 due to a sharp decline in the profitability of its European operations that it had acquired in 2007. The company was hit by a sharp rise in its debt level after this acquisition.
 
First, it lost out to Tata Motors in terms of revenue in FY11 and then in March 2015, Titan beat it to become the third-biggest firm in the group in terms of m-cap. In FY20, TCS reported higher revenue and Tata Steel had become the third biggest company in that terms.
 
Tata Steel, however, tops charts in the group in terms of total assets and total debt outstanding. The company had total assets worth nearly Rs 2 trillion and gross debt of around Rs 1.12 trillion at the end of September 2020.
 
Analysts now expect a sharp turnaround in Tata Steel financial fortunes in FY22.
 
For example, analysts at Edelwiess Securuties expect Tata Steel to report net sales of around Rs 1.73 trillion in FY22 and net profit of nearly Rs 20,000 crore. This will make Tata Steel the second most profitable company in the group, after Tata Consultancy Services.
 
"Tata Steel operating performance is set to improve significantly in FY22. We expect TSL to be the biggest beneficiary of the recent uptick in steel prices. Domestic iron ore integration and better-priced auto contracts are likely to result in record Ebitda in FY22," write analysts at Edelweiss Securities.
 

This will be a financial boon for Tata Sons, which has been repeatedly provided financial support to Tata Steel in the last decade through equity infusion. Tata Sons equity exposure in Tata Steel is its second-biggest investment in group companies, after its exposure to Tata Motors.
 
The group holding company has, however, hasn’t earned much by way of dividend from its investment in Tata Steel in the last 10 years. Total equity dividend payout by Tata Steel hasn’t increased since FY08.
 
Analysts now expect this to change due to the change in the global steel cycle. “Steel companies, including Tata Steel, could become a large source of dividend if the recent surge in their margins and profits sustains for a few quarters more,” says Shailendra Kumar, CIO Narnolia Securities.
 
On the flipside, Tata Steel remains one of the most indebted companies in its sector and analysts say that a significant part of its cash flow will go in servicing interest on debt and then debt repayment.
 
It can hope to become Tata Sons cash cow only after it uses the current upcycle in the industry to lighten its balance sheet.