Sell Tata Steel 370 Call Option at a premium of Rs 0.90

With Tata Steel stock up more than 21% in October alone and up around 73% (Price as on 21st Oct Rs 337) from the August low of 195, the rally has been more than justified and the stock is no longer attractive on valuations front. High debt and soft commodity prices will continue to put pressure on company's earnings in coming quarters. Technically 100 week average for Tata Steel is around 370 and 20 month average is around 360.

Hence option traders can sell 370 call option of Tata steel of October expiry at current market premium of 0.90 thereby generating a return of more than 1.6% in 8 days.

Sell Tata Steel 310 Call at 0.60 premium

Tata Steel has moved up sharply from the lows of 195 (7th Aug) to 180 (23rd Aug) due to short covering and improving fundamentals of steel domestically. However a 44% rise has been too steep in short period of time and hence might face significant resistance going forward. As on 29th May 2013, the stock started it's steep fall from 322 odd levels to a low of 195, and technically a 61.8% Fibonacci retrenchment ends at 275 odd level which could broadly be a big supply zone. 

Valuation wise Tata steel is trading at around 6 times EV to EBIDTA which is expensive compared to Arcellor Mittal Valuation which is trading at around 5.6 times EV to EBIDTA based on FY-14. Considering all these factors once can sell 310 call option of Tata Steel at current premium of 0.60 and generate 1.2% return on margin amount in 4 days.

Total Return from the trade:

Considering one is able to sell the Aug Call option of Tata Steel 310 strike price at current market premium of 0.60 he/she can generate following return from this trade:

Tata Steel Q2 FY 2011 - 2012 Result Analysis

Tata Steel, India's largest steel producer, today reported 89% drop in consolidated net profits for the second quarter of current fiscal at Rs. 212 crores vs. Rs. 1,979 crores in Q2 of previous fiscal. However the consolidated sales for the same period went up by 15.5% to Rs. 8,212 crores vs Rs. 7,107 crores sales in Q2 of previous fiscal.

　

Group EBITDA in Q2 FY’12 at 2,944 crores was 34.5% lower than the 4,497 crores recorded in Q2 FY’11. The Group EBITDA in Q2 FY’12 declined on account of higher global raw materials costs and lower average selling prices at Tata Steel Europe. 

LIC increases stake in Tata Steel

Life Insurance Corporation of India has bought 9.4 lakh shares in Tata Steel from the open market, hiking its holding in the steel-making firm to a little over 14%. 

Tata Steel sells Riversdale stake for $1.11 bn

Tata Steel has sold its 26.27% stake in Australian coal miner Riversdale to global mining major Rio Tinto for AUD 1.06 billion ($1.11 billion). The Anglo-Dutch miner Rio Tinto holds 73.2% stake in Riversdale, which has an estimated 13 billion tonne reserves in its two projects in Mozambique - Benga and Zambeze.

The deal would be very positive for the company as the cash flow will further reduce the net debt to equity ratio of the company.

The company reported good set of numbers in fiscal year 2011 and at the CMP of Rs.553 it's trading at attractive valuations as well (Tata steel FY11 results and valuation). However global correction in commodity prices could be a dampening factor in the short term.

Buy Tata steel - Recommends Goldman Sachs

Goldman Sachs has raised its 12-month price target for Tata Steel to Rs 774 from Rs 761 and maintained its "buy" rating on the stock following better-than-expected quarterly earnings.

Tata Steel, the world's No.7 steelmaker, net profit after taxes jumped about 72% to Rs 4,178 crore ($937 million) in its fourth quarter.

Tata Steel FY 11 Results & Valuation

Tata Steel registered full-year (April-March) consolidated net profit of Rs 8,983 crore compared with a net loss of Rs 2,009 crore last year on back of higher volumes, improved product-mix and higher realisations. The profit was also boosted by a one-time gains of Rs 2,091 crore from sales of Teesside Cast Products in February 2010.Total income of the company rose to Rs 1.19 lakh crore from Rs 1.03 lakh crore.

　

At the CMP of Rs. 572 the company commands a Market cap of approx Rs. 55,000 crores which is half the consolidated sales revenue reported by the company.

Based on PE multiple the stock is trading at the current year multiples of around 6 including exceptional income while it is trading at a PE of 7.9 if we exclude the one time income from the sale of Teeside Cast products.

　

The stock is currently trading at attractive valuations and can give descent return from the current levels. But investors should be cautious as globally the commodity prices are falling, and if the steel prices falls significantly from the current levels the future performance of the company will be badly affected as the company is in pure play commodity business.