Tata Steel: ‘Sell’ with target price of Rs 411 per share

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Published: June 26, 2019 12:41:48 AM

Tata Steel has entered into a long-term build-own-operate (BOO) agreement with Aarti Green Tech Limited.

tata steel, steel industryTata aims at achieving steel industry leadership in India with 30mtpa capacity by CY25 and simultaneous retention of current market share.

Our analysis of Tata Steel’s (Tata) FY19 annual report indicates that, operationally, the company continues to shine (with Shikar programme delivering another year of big cost savings Rs28bn). However, the strategic intent to attain industry leadership in terms of capacity remains at odds with deleveraging – and this is indeed a key concern. We maintain our SELL rating on the stock with an unchanged target price of Rs411/share.

Tata aims at achieving steel industry leadership in India with 30mtpa capacity by CY25 and simultaneous retention of current market share. However, such a goal does not gel with deleveraging, and it remains a key concern. Tata is: 1) building a 5,800 cubic metre blast furnace, 2) expanding the steel melting shop (SMS) and hot strip mill (HSM), and 3) adding a coke oven and a pellet plant at a total capex of Rs235bn, with the CRM to be commissioned first in FY21E. The expanded capacity will help produce cold rolled galvanised and annealed products catering to inter alia automotive and general engineering industries.

Management states in the annual report that it “will continue to focus on deleveraging as a primary strategic initiative to rebuild the balance sheet strength.” Yet no specific future target for deleveraging has been mentioned. FY19 net debt as calculated from the annual report works out to Rs1,011.9bn as against the Rs948.8bn as highlighted by the company (hybrid perpetual bonds + creditors for capital supplies added). The company has been able to extend the debt maturity profile by successfully raising Rs43.15bn 15-year NCDs, and 12year takeout financing for Rs155bn at Tata Steel BSL.

The first recycling unit is being set up at Rohtak, Haryana. Tata Steel has entered into a long-term build-own-operate (BOO) agreement with Aarti Green Tech Limited. It involves an investment of Rs1.5bn and the first unit will have 0.5mtpa capacity. Commercial production is expected in FY20 with plans to subsequently expand across India. Sales to the automotive sector stood at 2.12mnte in FY19 against 1.94mnte YoY (out of a total sales of 12.7mnte) – a growth of 8.2% as against industry growth of 6.3%. Tata Steel has retained its leadership in automotive flat products with a market share of 42%.

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