After a 514 percent jump from its COVID-low of ₹25, hit in March 2020, to a record high of ₹153.45, hit in August 2021, shares of Tata Steel started consolidating.
Currently trading at ₹129, the stock has lost 16 percent from its record high, however, it hit its 52-week high of ₹133.15 in the previous session (September 12) and has advanced 36 percent from its 52-week low of ₹95, hit on September 28 last year.
Brokerage house InCred Equities believes that this is the end of the road for Tata Steel's strong performance as European headwinds stage a comeback.
The brokerage has retained its ‘reduce’ call on the stock but raised its target price of ₹82 (from ₹70 earlier), indicating a downside of 36 percent.
"All hopes of balance sheet deleveraging have been dashed and, instead, its leveraging has started. Tata Steel will have to halt capex for deleveraging. A one-time subsidy from the UK government won’t help Tata Steel Europe. It needs subsidies on a regular basis to post a sustained positive EBITDA. The rise in TP is due to a higher P/E multiple (vs. 6x earlier)," it explained.
The stock has risen 15 percent in 2023 YTD, giving positive returns in 6 of the 9 months this year so far. It shed the most in February, down over 13 percent while rose the most in July, up 10 percent. Meanwhile, it has advanced almost 20 percent in the last 1 year.
In comparison, the Nifty Metal index has risen 3.3 percent in 2023 YTD and 13 percent in the last 1 year.
Why the reduce call?
Balance sheet is unlikely to improve: As per the brokerage, higher capex, multiple one-offs in payables, which resulted in extraordinary working capital release in FY21, have still not normalised, and lower operational cash flow as profits are trending downwards will result in balance sheet debt to remain at ₹80,000 crore for the next three years. Tata Steel has committed to incur a capex of ₹16,000 crore in FY24F. While the brokerage expects its capex to moderate (as profits fall), still the company should end up incurring ₹13000 crore and ₹10,000 crore capex in FY25F & FY26F, respectively, it noted. The consensus view has been quite bullish on balance sheet deleveraging, but InCred estimates net debt to increase to ₹80,300 crore by FY26F (FY23 net debt stood at ₹71,500 crore).
Europe’s EAF steel output to rise: The brokerage further pointed out that with lower power costs and increased scrap availability, Europe’s electric arc furnaces or EAFs are viable once again. They are much more profitable vis-à-vis blast furnaces (BFs) if we account for the carbon tax on BFs. Europe can easily produce 102-105mt of steel scrap (based on historical highs) and has around 90mt of working EAF capacity (operating at 65 percent utilisation).
"It is likely that we will witness a 13-14 percent rise in Europe’s EAF steel production in FY24F, exerting pressure on blast furnaces’ profits. Tata Steel mostly operates BF-based capacities and hence, its profits can remain under stress. We don’t feel that Tata Steel Europe (TSE) can post any positive EBITDA for the next three years," it explained.
Indian hot rolled coil (HRC) prices to remain subdued: Higher domestic steel prices are leading to increased imports from China, said InCred. While the industry is asking for protection, the brokerage believes it’s unlikely to come. The government protected the steel industry in FY16 primarily to save the banking sector. India has no such problems now as prices are high enough for steel companies to service their debt, it stated. FY24F is likely to be a dull year for coking coal prices as Europe will shift mostly to the EAF route to make steel. While Indian demand will rise, it won’t be enough to balance the coal market, observed the brokerage. It expects the market to remain in surplus (although only by 8-10t) in FY24F but from FY25F onwards, the coking coal market will be again in deficit.
In the June quarter, Tata Steel reported a 92 percent year-on-year fall in its consolidated net profit to ₹633.95 crore versus a profit of ₹7,764.96 crore in the year-ago period. Meanwhile, the company's consolidated total revenue from operations fell 6.21 percent YoY to ₹59,489.66 crore during the quarter ended June from ₹63,430.07 crore in Q1FY23. The steel major's revenues were impacted due to lower volumes, which were partially offset by higher realisations across geographies.
Profitability was impacted by a non-cash deferred tax charge related to a buy-in transaction at the British Steel Pension Scheme. With this, Tata Steel UK has successfully been derisked following the insurance buy-in of the British Steel Pension Scheme (BSPS), said the company in an exchange filing.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
