Is It Safe to Invest in Cyclical Stocks like Tata Steel?

Cyclical Stocks
Sep 28, 2023 Reading time : 2 min

The stocks affected by the macroeconomic or systematic changes in the economy are known as cyclical stocks. Such stocks have cycles of expansion, peak, recession, and recovery. Generally, cyclical stocks are companies that sell consumer discretionary items that you buy when the economy is good and refrain from buying during the recession.

For example, you would build a house during an economic expansion, peak, or recovery, and rarely do that during a recession. So, one such product affected by this psychology is steel, a significant product used to build a house. Should you invest in Tata Steel shares? Before we explore the specific case of Tata Steel, let us see if it is safe to invest in such stocks.

About Tata Steel

Tata Steel is among the top global steel companies and the most geographically diversified steel producers. From operations across the world, its annual steel production capacity is 34 million tonnes per annum. It consistently ranks among the top ten steel companies in the DJSI’s Corporate Sustainability Assessment. 

What Should Investors do?

In the past 16 months, Tata Steel share price has given a return of over 110%, as per a report from ICICIdirect. From Rs 610 in December 2020, Tata Steel shares have climbed to Rs. 1,288 levels. Consequently, the brokerage maintains a ‘buy’ rating on the stock. “We value Tata Steel at Rs. 1,600, based on SoTP valuations,” its report said. 

On the balance-sheet side, Tata Steel continued to reduce its debt levels, which augured well for the consolidated entity. As of FY22, on a consolidated basis, Tata Steel’s Net Debt to EBITDA stood at 0.8x (2.44x in FY21) and Net Debt to Equity stood at 0.52x (0.98x in FY21). Tata Steel’s consolidated net debt declined from Rs. 75389 crore as of March 2021 to Rs. 51049 crore as of March 2022 

Plus, according to ICICIdirect, in the short-term, the NSE Tata Steel has a low price-to-earnings multiple, with a relative strength index indicating share price strength, both of which are big positives for the company.

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