Here’s Why More Analysts Now Prefer Tata Steel 

Analysts continue to prefer Tata Steel Ltd. over its larger peer JSW Steel Ltd. as the Tata group company tries to lower debt and increased capacity from domestic acquisitions aided its earnings.

Nearly 78 percent of the analysts tracked by Bloomberg suggest a ‘Buy’ for Tata Steel, in line with 79 percent recommendations last year. That compares with a 53 percent ‘Buy’ rating for India’s largest steelmaker against 71 percent in the last 12 months.

That’s despite shares of Tata Steel plunging 25 percent in more than five months. JSW Steel’s stock, too, tumbled 37 percent from its September peak.

Here are the five reasons that helped Tata Steel edge over JSW Steel:

Lowering Debt

While announcing its third-quarter results, Tata Steel said its gross debt reduced by Rs 9,083 crore, including deleveraging of more than Rs 6,000 crore.

The company has been divesting stakes in its foreign businesses to focus more on the domestic market. It recently inked a pact with a Chinese entity to divest 70 percent of its Southeast Asia business for another Rs 3,500 crore. This is expected to further lower its debt.

The company also repaid Rs 3,000 crore from Tata Steel BSL Ltd. (erstwhile Bhushan Steel Ltd.) since its acquisition as part of the “overall deleveraging”, Executive Director and Chief Financial Officer Koushik Chatterjee had said in a conference call.

Tata Steel’s joint venture with Thyssenkrupp AG, once completed, will further deleverage its balance sheet by Rs 19,500 crore.

The company’s leverage, or net debt-to-earnings before interest, tax, depreciation and amortisation, is expected to come down to three times from as much as four times once the Thyssenkrupp deal is completed, according to BloombergQuint’s calculations.

In comparison, JSW Steel’s debt is set to increase given the potential acquisition of Bhushan Power & Steel Ltd. The company expects its leverage at 3.75 times in near term.

No Overhang On Balance Sheet

While Tata Steel’s acquisition of Bhushan Steel has started paying off, JSW Steel is still working on a turnaround strategy for Monnet Ispat & Energy Ltd.

Also, there are uncertainties around Bhushan Power & Steel Ltd.’s bids.

Tata Steel in its conference call had said it will not revise its bid—the highest in the first round—and the committee of creditors will take a final call on Bhushan Power & Steel case. The National Company Law Appellate Tribunal had ruled last week that JSW Steel’s revised offer for Bhushan Power & Steel was valid under the Insolvency & Bankruptcy Code.

Captive Iron Ore Mining

The captive mines of Tata Steel—an integrated steelmaker that produces its own raw materials—meets 100 percent of the company’s iron ore requirements.

In comparison, JSW Steel’s six captive mines collectively are expected to provide 4.5-4.7 million tonnes per annum of iron ore in the ongoing financial year, which is 15-20 percent of iron ore integration, as per its FY18 annual report, as well as reiterated by the management in a recent conference call.

This clearly gives Tata Steel an edge over JSW Steel at a time prices of the key raw material used in steelmaking are expected to rise after Brazil’s Vale SA—the world’s largest miner of iron ore—closed some of its operations after a fatal disaster.

Retains Full-Year Guidance

While JSW Steel, impacted by a decline in exports, lowered its guidance for FY19 sales volumes, Tata Steel maintained it at the same level—reflecting limited reliance on exports and a growing focus towards Indian markets.

Discounted Valuation

With the recent fall in stock prices, the valuation gap between Tata steel and JSW steel has been nearly erased. Yet, JSW Steel commands a lower discount than Tata Steel.