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Tata Steel: Near-term headwinds continue despite mining resumption

Start of iron ore mining in Odisha a positive, low demand a concern

Ujjval Jauhari  |  New Delhi 

Tata Steel has been one of the worst performing scrips in 2014, languishing at the bottom five of the CNX Nifty. The company whose stock fell six per cent, got some relief after favourable high court orders in Odisha (resumption of iron ore/manganese) and Jharkhand. This bodes well for profitability of Tata Steel’s Indian operations, especially those related to the Jamshedpur plant and expansions in Odisha. However, the recent approvals are in force till the next hearing. Hence, investors will need to keep an eye out for development in this space and whether this will lead to a complete resolution of mining issues.

Analysts at Motilal Oswal say they expect the Odisha HC to extend this order at least till February, 15 expiry of when the extension granted by the Supreme Court to the Odisha government to decide on the renewal of 26 iron ore mines. They add the judiciary has not made any adverse remarks against Tata Steel India’s mines.

Analysts at JPMorgan say with all the key iron ore mines to be on stream, the fear of an earnings hit in the March 2015 quarter are behind it and costs should reduce sequentially. This will also help mitigate pressure from the Rs 2,000-2,500 steel price fall in the second half of the current financial year.

However while concerns on the domestic front are receding, headwinds in the international market will keep investors watchful. Tata Steel Europe’s prospects are not showing much improvement as international steel prices continue to plunge. The European Union hot rolled coil prices stood at ^391 a tonne on December 15 compared to around ^425 a tonne at the end of September. Lower-priced supplies from the CIS countries and China are putting pressure on prices. For Tata Steel Europe, the challenges on profitability will continue though partial relief could come though depreciation of euro against dollar.

Motilal Oswal analysts, who have a target price of Rs 590, remain positive on the stock, given the operational strengths of Tata Steel, volume uptick from the Kalinganagar project in Odisha and start of the investment cycle in India. Analysts at JPMorgan feel the recent correction in stock prices (sub Rs 400 level) is partly driven by China turbulence and India regulatory woes (Jharkhand mining ban). These, they think, are short-term issues, and improving local demand as well as expectations of a potential improvement in European metals demand are positive for Tata’s European operations. They believe improvements in Europe over the next two years will result in a re-rating of the stock and arrive at a sum of the parts target of Rs 630.

First Published: Tue, December 30 2014. 21:35 IST