A note on Tata Steel

Commenting on my blog of 25/8/2011, Suresh raised two questions; one on the falling prices of some of the prominent stocks like Tata Steel, JSW Steel etc. and the second was regarding liquidity in the hands of retail investors.  Since I though these issues need to be elaborated, I decided to make it a fresh post.

Let me take Tata Steel for example, a stock in which I have some interest.  The 52 week high/low for this stock is 737/418.  What is more interesting is that it traded at around Rs.600 during the first week of July then fell to the current level of Rs.422.  This period coincides with the fall in most of the major indices.  The stock is currently trading at a P/E of 5.4, whereas the industry P/E is 7.43.  The sales are growing at 20% and the profit at 30%.  The dividend yield is 2.85%, which is fairly high in Indian markets.  With infrastructure sector expecting a fillip, the steel prices are expected to go up, which would definitely improve the profitability position of Tata Steel.  With all the above facts, I leave the decision on Tata Steel to my readers. 

If somebody picked this stock at 600 levels with an intention of making quick money by selling the same in a couple of weeks, I wouldn’t call him an investor; he is a speculator.  A speculator has no reason to cry when the markets crash, as he must anticipate and be willing to accept huge downside risk.  But if someone bought this stock with an intention of holding it for fairly long term, why is he worried about the current volatility?  Once an investor picks a stock, after making reasonably good analysis of the fundamentals, what he should worry about is not the fall in price, but the reason behind the fall.  If the fall is attributable to an overall fall in the market, that’s alright.  But if the fall is caused by dilution of the fundamental strength of the stock, which prompted him to buy, then he needs to worry (take the case of SKS microfinance).

Let me briefly touch upon the second aspect of retail investors not having sufficient liquidity.  This is where investor education plays a role.  Retail investors can either use MFs or have some systematic investment formula, which results in reduction of average price over a period.  This would bring some discipline, in the sense that he earmarks certain amount for equity investment every month.