Stock analysis: Tata Steel

Tata Steel is one of the world's largest steel companies with a global annual crude steel production capacity of 34 million tonnes per annum (MnTPA). The company is a diversified steel producer with major operations in India, Europe and South-East Asia.

It has manufacturing units in 26 countries and a commercial presence in over 50 countries. Tata Steel is the second-largest steel producer in Europe with a crude steel production capacity of over 12.1 million tonnes per annum.

Tata Steel Ltd was incorporated in the year 1907 with the name Tata Iron & Steel Company Ltd. In the year 1911, the company commenced the operations of the first Blast Furnace or the 'A' Blast Furnace.

The Company has 209 subsidiaries and 49 associate companies (including 28 joint ventures) as on March 31, 2021.

Tata Steel won the World's Most Ethical Company award in 2021, by the Ethispherer Institute for the tenth time.

Product Portfolio

Tata steel offers hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction rebars and bearings. It is one of the few steel companies that are fully integrated - from mining to the manufacturing and marketing of finished products.

The company is also involved in prospecting, discovering, and mining iron ore, coal, ferroalloys, and other minerals; designing and manufacturing plants and equipment for steel, oil and natural gas, energy and power, mining, railways, ports, aviation, and space industries; and agricultural implements.

Further, they offer alumina, dolomite, and monolithic refractories, as well as silica refractories for coke ovens and the glass industry; manufactures bricks; sponge iron lumps and fines; and rolls for applications in integrated steel plants, power plants, and government mint, as well as paper, textile, and food processing sectors.

In FY21, the company’s 48% revenue came from India, 39% revenue from Europe, and 13% from Asia Excluding India, Says Axis securities in a research report.

Tata Steel's operations are grouped under six Strategic Business Units including Bearings Division, Ferro Alloys and Minerals Division, Agrico Division, Tata Growth Shop (TGS), Tubes Division and Wire Division.

Company has introduced several branded steel products, including Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (rebars), Tata Pipes, Tata Bearings, Tata Structural, Tata Agrico (hand tools and implements) and Tata Wiron (galvanised wire products).

Opportunity

Regional steel prices have increased recently due to the escalated Russia-Ukraine conflict. Indian domestic HRC prices have increased by 13% MoM in India. The steel price hike is sharp in Europe which incentivised the Indian steel mills for exports to the EU, says report.

It further said that, China’s decarbonisation leading to lower steel exports is creating opportunities for Indian steel mills to fill the volumes.

Competitive advantage

Tata Steel meets 100% of its iron ore requirements in India, through its captive iron ore mines and about a quarter of its coking coal requirements from its coal mines. These captive mines provide a structural hedge to the price risk of these commodities.

Tata steel has ferroalloy production facilities in India at Orissa at Joda, Bamnipal, and Gopalpur under Ferro Alloys and Minerals Division (FAMD). It has captive Chrome and manganese ores, which are used in the production of ferroalloys. 

Security in terms of steel raw materials, such as Iron ore and ferroalloys provides a cost advantage to Tata steel India as compared to other steel players.

“Tata Steel has designed multiple routes to market to connect, transact and engage with customer groups and enabled digitally. It has a direct route for B2B customer groups, distributors for B2ECA and distributors and dealers as channel partners for B2C”, it added.

Key Financials

According to Axis Securities, Tata Steel accomplished tremendous deleveraging, as a result of which the company's net debt has decreased from a height of ₹1 Lc Cr in FY20 to ₹62,869 Cr as of Dec'21. The company's balance sheet is on good ground because of strong steel prices, disciplined Capex outflow, and working capital management, it added.

It expects tata Steel's Net debt/EBITDA will decline to 0.95x from the peak of 5.8x in FY20 (FY21 at 2.4x), much below the cycle average target of 2.0x, putting the company in a comfortable position to pursue growth Capex moving forward.

"Group EBITDA/tonne peaked at ₹24,112/tonne in Q2FY22, driven by strong steel prices. While we don’t foresee a repeat of the peak margin level, mainly due to higher coking coal prices", report added.

The brokerage house expects a jump in EBITDA to 114% YoY in FY22E at ₹66,202 Cr and a decline from the peak in FY23E/24E at ₹49,504 Cr and ₹41,327 Cr. These levels, nonetheless, are much above the historical EBITDA levels in the past decade (FY18/19/20 at ₹21,369/29,770/18,103 Cr).

In the latest quarter number, Tata Steel reported a 139% jump in consolidated net profit of ₹9,598 crore for the quarter ending December 31, 2021.

Consolidated revenue surged 45% to ₹60,783 crore as against ₹41,935 crore a year ago.

Consolidated free cash flow was ₹6,338 crore in 3QFY22 despite an increase in working capital of ₹2,045 crore.

EBIDTA growth stands at 64% and Profit after Tax growth stood at 139%.

Stock Performance

In the past one year, the stock of Tata Steel has surged 49 per cent as compared to a 22 per cent rise in the S&P BSE Sensex, Moreover, in the past 3 years, it has rallied 149 percent.

Further, over the past five years, the market price of Tata steel has zoomed 177 per cent, as compared to a 105 per cent surge in the Sensex.

Future plans

Tata Steel plans to double its capacity from 19.6mtpa to 40mtpa through a combination of organic/inorganic expansion in India.

Post the recent acquisition of Bhushan Steel, Usha martin steel business and NINL (Neelanchal Ispat Nigam ltd.), the company has got sufficient land bank and iron ore mines, says report.

It is currently pursuing growth Capex at the Kalinganagar phase II to expand from 3mtpa to 5mtpa, (completion expected by the end of FY24). It continues to focus on ramping up the existing 1mtpa plant at NINL and front-loading the Capex to simultaneously expand it to 4.5mtpa.

Outlook

Axis Securities initiates coverage on Tata Steel with a ‘BUY’ recommendation and a Target Price (TP) of ₹1,700/share, implying an upside of 26% from the CMP. The stock is currently trading at 4.6x EV/EBITDA (consensus 1-Year forward) below its 10Y average of 6.3x.

It expects steel prices to remain resilient which would drive strong cash flows for the company in the upcoming quarters and allow it to continue deleveraging even after pursuing its growth Capex. Although higher coking coal prices would impact the margins in 1HFY23, the margin trajectory continues to be robust and above the historical average, thereby driving profitability for the company.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.