Despite upgrade, it may be prudent to book profits in Tata Steel

An eventful year awaits Tata Steel. The company is expected to complete its domestic expansion in the next quarter. Also, its iron ore and coal mines in Canada and Mozambique will start production soon.

In a report on the company, Credit Suisse has said that the global crisis notwithstanding, it is hard to justify a valuation of the company below Rs 340. The broking firm has upgraded Tata Steel to ‘Neutral’.

[caption id=“attachment_171215” align=“alignleft” width=“380” caption=“Though the stock is approaching value it is still not cheap. Reuters”]  [/caption]

Concerns over the macro scenario, however, continue. Tata Steel’s European operations continue to be affected by a liquidity and demand crunch. Recent reports say that the company will be cutting output in its European unit by 15-18 percent.Banks in Europe continue to tighten their purses, adding to the slowdown in the continent. Though the opening up of liquidity is expected to be equally sharp, Credit Suisse is not sure that it will be anytime soon.

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Events in China are adding to the woes of the industry. Re-stocking of inventory looks 12 to 18 months away. Demand growth in China is expected to remain at around 2-3 percent over three years. This will lead to pricing pressure on steel during the period.

Despite an 18 percent depreciation of the rupee, Indian steel prices, which are pegged to landed prices (total cost of a landed shipment, including purchase price, freight, insurance, and other costs up to the port of destination), have remained unchanged. This highlights the weak demand in India.

However, more than the Indian slowdown, a higher than expected slowdown in China and Europe is preventing Credit Suisse from recommending a buy call on the company. There is also a risk of further book value erosion due to UK pension fund issues.

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In conclusion the report says that though the stock is approaching value it is still not cheap. Looks like Tuesday’s rise of 5.73 percent to Rs 360 makes it a good time to book profit.