(Bloomberg) -- A revamp of its European operations, an improved product mix and a ban on cheaper steel imports to India may bolster the fortunes of Tata Steel Ltd.’s shares, the least valued stock on the South Asian nation’s benchmark equities gauge.
Tata Steel shares have lost nearly half of their value since Jan. 2018 to trade at a price-to-earnings ratio of 4.7, the lowest on the S&P BSE Sensex Index. The company, which last year got more than 50% of its sales abroad, last week outlined job cuts and other measures aimed at cutting costs in Europe, which it called a “dumping ground” for steel.
“Indian steel prices may have found a floor, thanks to the minimum import price, and have already started moving up,” said Siddharth Gadekar, an analyst at Equirus Securities Pvt., “That kind of stability in prices gives investors confidence.”
Tata Steel has been closing and selling plants in the U.K since the 2008 financial crisis to make its business there more profitable. It’s now focusing on India, and aims to ramp up capacity as demand is set to expand by as much as 7% in 2020, according to the World Steel Association. That’s the most among the top 10 steel using countries.
While protection from cheaper shipments from abroad will also benefit Tata Steel’s domestic peers, its valuation advantage, product mix and debt reduction steps may increase its appeal to investors. India imposed a minimum import price for steel products in 2016.
“Tata’s volume of sales should beat the rest of the industry because of their value for money offering, and their entrance into the pipeline steel category,” said Richard Leung, an analyst with Bloomberg Intelligence, “The rest of the industry may see muted growth next year because of reliance on legacy demand like automobiles.”
To be sure, Tata Steel’s debt-to-equity ratio is higher than most local peers, largely due to its 2007 purchase of Corus Group Plc for about $13 billion and its acquisition of Bhushan Steel for about $5.3 billion last year. Still, Moody’s Investors Service said in a Nov. 25 note that the company’s European cost cuts will support a turnaround in less profitable operations that have hurt the company’s overall credit quality.
“In a down cycle the companies that have higher debt tend to trade at a discount,” said Equirus Securities’ Gadekar, “With their earnings profile and current steel prices, they can service their debt easily.”