Tata Steel has announced a plan to invest in a 3mtpa EAF based steel capacity at Port Talbot in the UK. The project will cost £1.25 billion ($1.55bn). Of this the Tata Steel will invest £750 million and UK government will provide £500 million support.
Jefferies: Jefferies has a Buy rating on the stock after the announcement with a price target of Rs 145 with room for 10% upside. The brokerage currently estimates Tata Steel to generate free cash flow (post interest payment) of $1.4-1.9 billion annually in FY25-26e. Jefferies believes while the overall cash outflow is manageable and the transition to a new EAF facility could improve profitability as well as pave the way for decarbonization. They see the decision to invest in UK based steel-making as a missed opportunity to reduce exposure to historically high-cost low-margin geography.
JMFL: JM Financial Institutional Securities pointed out that the capex cost of 1.25 billion pound includes grant from the UK Government of up to 500 million pound (subject to approvals). They believe that this one time grant is a sentimental positive at best with current operational loses of the plant likely to offset this grant in a matter of couple of quarters – more post the end of the consultation period. According to them the project is designed to achieve decarbonisation of the local steel industry and ensure cost savings (EAF vs BF route) of 150-170 pound per tonne. The proposed project would also involve Tata Steel’s Balance Sheet being restructured with potential elimination of the current cash losses in UK operations and non-cash impairment of legacy investments. Tata Steel UK will continue to ensure uninterrupted and reliable supply of products to maintain their high market share in the UK.
Prabhudas Lilladher: According to them the Tata Steel UK (TSUK) transition is EPS accretive given current cash losses will end, as company will import substrate instead of producing at old facilities. According to them the one-time cost will exist, but it is expected to be in better situation than earlier case of recurring cash burn. Volatility in coking coal prices is unlikely to directly affect earnings of Tata Steel UK and the potential fall in energy costs, as UK moves towards renewable sources is seen accretive to the stock price. Prabhudas Lilladher revised the FY25E EBITDA estimates upwards by 5% to Rs 41,100 crore and introduced FY26E earnings estimates. They are maintaining ‘Buy’ at revised target price of Rs 144 (Rs 137 earlier) assigning EV/EBITDA multiple of 5x for FY25E EBITDA for TSE.