Click Here For Fundamental Analysis And Intrinsic Value Of Tata Steel Ltd. (2023-24)
Dated: 23 Mar 23
Company: Tata Steel Ltd.
CMP: 104.85

Intrinsic Value Of Tata Steel

Introduction

In this article we will try to analyze Tata Steel Ltd. Based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health of the company, operating efficiency, profitability etc. and finally try to arrive at the intrinsic value of the stock based on Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Leverage Ratios

Observations:

1. The debt on the company has reduced to a great extent. This is clear as the debt/equity and debt/ asset ratio have shown a remarkable improvement.
2. The interest coverage ratio shows a commendable improvement from the dangerously low levels of 0.73 to 10.2 which is healthy.

Operating Ratios

Observations:

1. There is slight improvement in the operating ratios over the period under consideration.
2. It is better to assume that the operating efficiency of the company has more or less remained the same during the period.

Profitability Ratios

Observations:

1. Except of year 2020 we can see improvement in the profitability of the company.
2. EBITDA margins have been consistent in the pre COVID era and have shown improvement post COVID.
3. ROA is relatively low throughout as compared to other metrics. This means there is still room for improvement on that front as company has lot of underutilized/ unutilized assets.

Intrinsic Value

Assumptions:

• The increase in cash flow is assumed to be Rs. 3100 Cr. For the first five years and then Rs 1550 Cr from sixth to tenth year. The growth rate is based on linear regression analysis of the past Free Cash Flows(refer to figure below). In the past free cash flow has increased at the rate of Rs. 6200 Cr per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Terminal growth rate is assumed to be 0%.
• Discount rate is assumed to be 12%.
• Free Cash Flow is extrapolated with the base value as Rs 10000 Cr. The average of free cash flows for the previous years is Rs. 17000 Cr. As a conservative figure we assumed Rs 10000 as the base value.
• Increase in Revenue is assumed to be Rs.8150 Cr per year for the first five years and then Rs 4075 Cr pre year for the next five years. This growth rate is based on linear regression analysis of previous year’s revenues (refer to figure below). In the past free cash flow has increased at the rate of Rs. 16300 Cr per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Free cash flow will be 10% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.1. Here we assume that the same average will hold good for future.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Revenue Growth Model

Intrinsic Value: Rs. 136.56

Stock Entry price with 25% margin of safety: Rs.102.42

Free Cash Flow Growth Model

Intrinsic Value: Rs.177.48

Stock Entry price with 25% margin of safety: Rs.133.11

The average of the above two stock entry prices works out to be Rs.117.76. When the stock starts trading below this price it becomes attractive for long term investment.

Author

Jibu Dharmapalan

Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.nseindia.com/get-quotes/equity?symbol=TATASTEEL#Annual_Reports

https://www.tatasteel.com/investors/financial-performance/financial-results/

More about the Company:

Board Of Directors

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