The brokerage has cut its estimate of FY21/22 steel deliveries by 12 per cent/9 per cent and EBITDA by 49 per cent/12 per cent. It expects Tata Steel to report a loss in FY21.
Emkay Global has given a hold rating to Tata Steel with a 12-month target price of Rs 340. The share price moved down by -0.92 per cent from its previous close of Rs 326.70. The stock’s last traded price is Rs 323.70.
Tata Steel’s Indian business has delivered a strong operating performance, with EBITDA of Rs 12,187/t. However, the brokerage notes that the bigger surprise was Europe delivering positive EBITDA of $4/t. Emkay Global expects the Tata Steel Europe (TSE) business to report a loss in the first half, due to compressing steel spreads. Leverage remains high and absolute net debt is also above the Rs 1 trillion mark. The brokerage expects no deleveraging in FY21 and FY22 as the support to Europe and capex in India will ensure high leverage. Only an uptick in the steel cycle will not support deleveraging.
Investment Rationale
The brokerage says the stock is trading at 0.5 times its FY22 P/B estimates, which is close to the company’s trough valuation. However, it lacks triggers for upsides other than steel prices. With no volume growth and divestment plan, the brokerage expects the European business to continue to be a drag on parent operations and constrain any plans for deleveraging in the near term. The outlook for the global economy, especially with the second wave of Covid-19 in China and many other countries, can impact any green shoots of revival. Further, mining disruption in Brazil due to Covid-19 can lift iron ore prices.
The brokerage has cut its estimate of FY21/22 steel deliveries by 12 per cent/9 per cent and EBITDA by 49 per cent/12 per cent. It expects Tata Steel to report a loss in FY21. The brokerage has rolled over valuation to Mar-22 on a SoTP basis and cut the target price to Rs 340 from Rs 485, while downgrading the rating to hold.
Key risk is a surge in steel prices. Downside risk is the second wave of Covid-19.
Financials
For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 33769.95 crore, down -2.89 per cent from last quarter sales of Rs 34774.29 crore and down -18.01 per cent from last year same quarter sales of Rs 41186.44 crore. The company reported net profit after tax of Rs -1708.18 crore in the latest quarter.
Promoter/FII Holdings
Promoters held 34.41 per cent stake in the company as of March 31, 2020 while FIIs held 12.39 per cent, DIIs 29.36 per cent and public and others 29.32 per cent.
Get Unlimited Access to The Economic Times
