Tata Sponge – A detailed Analysis

Stocks belonging to a sector more or less move in a specific direction with only divergence being in the percentage movement of each stock. Hence if a sector is bullish, the weakest stock would generally move the least while the strongest gains the maximum. On the other hand, when a sector shows bearishness, weak stock tumble much more than strong stocks do.

But its a rarity in itself to find one stock of the sector moving in a direction opposite to the sector as well as all other sector stocks. Tata Sponge Iron is one such stock. While the CNX Metal Index is down 12.4% as on date for the year 2014, this stock is up by 40.5%, a kind of divergence that is not generally seen.

Metal is a cyclical sector which means that unlike say consumption sector, long term gains are hard to come. For example, Tata Steel is available at a price (not adjusted for Dividends) which was seen way back in October 2003. In fact, the stock was available recently for the same price as it traded way back in 1994. Same is the case with most other metal sector stocks as well.

SAIL for example is currently trading at its 1994 price while Hindalco is available at its 1996 price. The only stock belonging to the sector which has given an Investor long term gains is Sterlite which at the time of its merger (and hence delisting of the Original Sterlite) was trading at a price seen in 2006 (Adjusted for Bonus / Splits, Sterlite was available in 2004 for a price of 20 vs 90 which was the price at the time of delisting).

Coming back to Tata Sponge, its tough to visualise how we shall move forward from here. Technically speaking, the stock has just hit its all time high which is bullish and this is being supported by higher volumes as well. Fundamentally, the stock trades at a PE of 7.80 which is nearly half the PE of Nifty. Comparatively the PE of the Industry which it belongs to is at  28.46 making this stock pretty cheap in relative to its peers.

But the sucker lies in the 5 Year EPS growth which comes in at -2.23% which suggests that over the last 5 years, the company hasn’t given much of earnings growth. But then again, this breakout we are seeing is one which is breaking the 2010 high and hence the returns of the stock during the last 4 years has been zero compensating for the low growth / no growth phase.

The trigger for the current rally has been on back of media reports that the government has put on hold the cancellation of coal blocks allotted to the company due to pending court cases. If this turns out not to be true, the probability that we shall see the breakout level of 350 remains pretty high. For now though, its a buy on dip with the ultimate stop being set below 340.