Business & Investment

Analyst Corner: TP assigns “neutral” to Tata Steel at Rs 1,210

The short-term outlook for TSE is strong, driven by rising prices, but structural increases in costs due to tighter emission standards and Brexit are long-term concerns about sustainable profitability and cash neutrality. It is a matter.

Rising carbon costs in Europe are an important concern. Tata Steel (TATA)’s 21st Annual Report highlights the company’s ambition to maintain leadership in quantity, cost and sustainability. The improved cash flow will bring the focus back to the growth of the Indian business, with the goal of doubling production capacity to 35-40 tonnes by 2030.

However, as debt repayment remains the focus of management, we plan to take this path cautiously. As for Tata Steel Europe (TSE), management clearly seems concerned about tightening emission standards in Europe, rising carbon credit costs, and the consequent loss of competitiveness for imports into Europe. is. We expect the leverage to continue to rise against the backdrop of rising prices, but we believe that rising carbon costs and the burden of TSE sustainability capital investment are important concerns. Therefore, TP assigns a neutral rating of Rs 1,210.

Carbon costs and Brexit rise to structurally increase TSE costs: The short-term outlook for TSE is strong, driven by higher prices, but with structural increases in costs due to tighter emission standards. Brexit is a long-term concern for sustainable profitability and cash neutrality. ..

Currently, the carbon credit price is trading at 52 euros / ton (135% year-on-year), and the need to purchase carbon credits is increasing, so the burden of carbon costs on the TSE may increase after FY2010. I think it’s expensive. Part of this increase should be offset by the recent € 12 / t carbon surcharge imposed by Tata Steel UK, but sustainability depends on tight supply and demand.

Ratings and Views: With the availability of captive iron ore, TATA’s Indian operations are impacting steel prices and we believe we need to stay high in the long run. Therefore, the margin is expected to remain high in the medium term (standalone EBITDA / t could reach a new lifetime high of Rs 33,000 in the first quarter of 2010). The TSE margin should also be strong in 2010 (expected to exceed US $ 100 / ton), but rising carbon costs will challenge maintaining the same. Consolidated sales / EBITDA / PAT are expected to increase 36% / 94% / 2.9 times to 2,134b rupees / 592b rupees / 326b rupees in FY2010. Despite the resumption of growth capital investment, leverage should remain strong. Net liabilities are expected to decrease further from Rs 20.4 billion to Rs 62.1 billion in 2010. In FY23E EV / EBITDA, the TP reached 1,210 rupees, which is 5 times higher in the Indian business and 4 times higher in Europe.

Our TP means EV / capacity is USD 902 / ton. This is a 30% premium over the average of US $ 700 / ton over the last five years, taking into account the benefits of de-leveraging from the current upcycle. Given the limited upside, however, we rate it as neutral.

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Analyst Corner: TP assigns “neutral” to Tata Steel at Rs 1,210 Analyst Corner: TP assigns “neutral” to Tata Steel at Rs 1,210

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