InvestorQ : Do you also see Tata Steel catching up with TCS on valuations?
Aditi Sharma made post

Do you also see Tata Steel catching up with TCS on valuations?

Mahima Roy answered.
3 weeks ago

There are two things to remember. Firstly, steel is cyclical and secondly steel companies normally binge on debt. Normally, it is only in the upward leg of the cycle that steel companies are immensely profitable. For the better part of the cycle steel sees flat to low profit growth or even negative profit growth. Tata Steel, despite deleveraging, has debt of Rs.60,000 crore in its books compared to negligible debt for TCS. That is a huge gap.

To cut a long story short, the valuation gap is very likely to stay. In a way, it is true that for a group like the Tatas, the dependence on TCS has been quite substantial. Unlike the organic growth strategy of TCS, both Tata Steel and Tata Motors made mega acquisitions in the form of Corus and JLR during their peak days and are still trying hard to integrate them.

Despite Tata Steel looking poised to beat TCS on yearly profits, the market capitalization of Tata Steel is just about one-eighth that of TCS. That is the premium which investors pay for the stability, predictability and adaptability of the TCS business model. It is tough to imagine Tata Steel replicating such a de-risked model in steel. For now, it looks like TCS will continue to drive the valuation story for the Tata group for many years to come.