Despite a decline in net profit in the June quarter as well as a 33 percent fall in the stock price in this period, brokerages remain bullish on steel major Tata Steel and expect a potential upside of up to 79 percent for the stock.
The company's net profit declined 13 percent YoY to ₹7,765 crore for the quarter ended June 2022 versus ₹8,907 crore recorded during the same quarter last year. On a sequential basis, the net profit fell 20.4 percent from ₹9,756 crore in the January–March quarter.
Its consolidated revenue, however, rose 18.6 percent to ₹63,430 crore versus ₹53,465 crore in the year-ago period. However, sequentially the revenue declined 8.5 percent.
The company's performance during the quarter was impacted by the higher raw material prices leading to an increase in operating costs. Also, the export duty imposed by the government declined the exports which had a negative impact on the volumes.
However, various brokerages remained bullish on the stock since the company beat Street estimates.
The consolidated EBITDA (earnings before interest, tax, depreciation and amortization) for the quarter came in at ₹15,047 crores which was flat on a sequential basis but fell 7 percent as compared to the same period a year ago.
According to Macquarie, the firm's consolidated EBITDA beat expectations. European Union (EU) EBITDA per tonne surprised positively, as lagged impact of a steel price hike was reflected during the June quarter. The brokerage expects profitability to fall in the second half of FY23 given a recent correction of steel prices in the EU. It has a 'buy' call on the stock and expects it to hit ₹1,670, indicating a potential upside of 74 percent.
Meanwhile, another brokerage Ambit Capital sees the company touching 1,700 in the next 12 months, implying a 79 percent potential rise in the stock. It said that Tata Steel remains one of the strongest deleveraging stories in the metals space.
"We believe trough EBITDA/tonne is likely in India in 2Q, at possibly ₹14,000/t vs ₹8,000/t previous downcycles. However, TSE will hit trough earnings with a lag, just as it has peaked with a lag," said Ambit.
It believes Q4FY23 could be tough for Tata Steel Europe (TSE), with contracts rolling off, the possibility of demand destruction and higher energy prices. However, the EU is not homogeneous, it noted. Germany will have to bear the biggest brunt, so, Arcelor, Thyssenkrupp and Salzitter could be the worst affected while Tata Steel Europe especially Ijmuidden, could be relatively less impacted, the brokerage pointed out.
It further noted that there are structural changes in the EU steel industry, which support higher margins versus past and expects TSE margins to moderate to $50/t by Q4FY23 given unusual circumstances, but still better than EBITDA/t loss historically.
"While Tata Steel still has high operating leverage, steady deleveraging has reduced its financial leverage over the past 2 years. It is not just a trade on iron ore prices anymore, it remains one of the strongest deleveraging stories in global metals. Various cost improvement programmes have also helped curtail conversion loss in India, which is one of the reasons why it should report higher EBITDA/t in India in FY23 vs previous downcycles. Its book value should increase in FY23, even in a recession, something not seen in previous downcycles," explained Ambit.
Meanwhile, Centrum Broking is also bullish on the stock with a target price of ₹1,368, implying a 44 percent upside in the stock.
The brokerage noted that the highlight of the Q1FY23 result was higher profitability in Europe (TSE) which surpassed India’s (TSI) profitability too. At TSE, higher steel prices due to a few contracts negotiated at higher prices offset lower volume and higher raw material cost, resulting in EBITDA/t of $366/t (up from $241/t in Q4FY22).
However, back home, despite a sharp increase in steel realisation, higher coking coal cost, lower volume and higher opex resulted in TSI EBITDA/t declining by ₹2,364/t QoQ to ₹21,326, it added. The brokerage increased FY23E EBITDA estimates by 9 percent, primarily to factor in higher gross profits at TSE while maintaining India’s EBITDA.
Management Commentary
“This has been a challenging quarter for the Global and Indian economy with rising interest rates, supply chain constraints and a slowdown in China due to COVID, but despite these multiple headwinds, Tata Steel has delivered a strong performance with an improvement in margins”, said T V Narendran, Chief Executive Officer & Managing Director while commenting on the performance for the quarter.
“We expect that volatility in terms of steel price and input cost movement to continue in the next quarter but expect the spreads to stabilise in the second half of the year. The volatility in commodity prices and immediate impact of the export duty in India has led to an increase in working capital but our cost improvement and other initiatives along with the expected pickup in demand in the second half of the year should result in normalisation of working capital," Koushik Chatterjee, Executive Director and Chief Financial Officer stated.
Stock Price Trend
The stock has risen nearly 10 percent in July so far, however, it posted negative returns in the 3 previous months, falling 33 percent in the June quarter (April-June 2022). In 2022 YTD, it has fallen 14 percent and has shed 27 percent in the past 1 year.
In comparison, the Nifty Metal index has declined 4 percent. Among peers, SAIL is the only steel stock that has fallen more than Tata Steel in the past 1 year. It has lost over 40 percent in this time. Meanwhile, JSW Steel has lost 17 percent while JSPL has fallen 13 percent in the last 1 year.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.