Analyst Corner: Maintain ‘hold’ on Tata Steel with target price of Rs 520

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Published: July 27, 2019 2:50:13 AM

Despite demand headwinds from auto sector weakness, TS-BSL reported better-than-expected Ebitda of Rs 9,100/t.

Analyst Corner, Tata Steel BSL, Tata Steel target price, tata steel stocks, tata steel sharesMaintain ‘hold’ on Tata Steel (TSL) with TP of Rs 520 on 6.3x September 2020E Ebitda.

Tata Steel BSL’s Q1FY20 Ebitda of Rs  780 crore surpassed our estimate. Key highlights: 1) proportion of exports fell to 15% in Q1FY20 (Q4FY19: 26%); 2) shipments were flat at 0.86mt; and 3) lower cost of production. Going ahead, we expect the demand headwinds to sustain on weakness in the auto sector and the company’s Ebitda/t to dip following recent decline in steel prices to Rs 7,200-7,500 despite cost optimisation initiatives. Maintain ‘hold’ on Tata Steel (TSL) with TP of Rs 520 on 6.3x September 2020E Ebitda.

Despite demand headwinds from auto sector weakness, TS-BSL reported better-than-expected Ebitda of Rs 9,100/t. In our view, TS-BSL’s Ebitda/t rebounded 33% q-o-q (despite a 25% dip in volume) owing to: 1) domestic oriented product mix — proportion of exports fell to 15% from 26% in Q4FY19; 2) value-added premium over HRC jumped 41% q-o-q to Rs 9,035 owing to focus on the more profitable domestic market; and 3) raw material cost per tonne was down 8% y-o-y owing to lower coking coal prices, though iron ore cost stayed flat. Going ahead, we expect the prevailing weakness in the auto sector to weigh on TS-BSL’s performance in the near term.

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We believe, the Ebitda uptick at TS-BSL may not get replicated in other companies’ numbers as such a shift in product mix is unusual within a quarter. Going ahead, in case of TS-BSL as well, we expect Ebitda/t to dip given the recent decline in steel prices. However, cost reduction initiatives being pursued at are likely to maintain it at Rs 7,200-7,500/t.

While TS-BSL is a good strategic fit to TSL, in the near term, there are challenges primarily due to the recent slowdown in the auto sector. We estimate Ebitda/t of Rs 7,200-7,500 through to FY21 on cost reduction initiatives being pursued at TS-BSL.

We maintain ‘hold/SP’ with TP of Rs 520. At CMP, the stock is trading at 5.9x FY21E Ebitda. Tata Steel is a diversified steel producer.

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