BUY

Results Update Tata Steel Target Price

5th May, 2022 Steel 1700

Strong Q4FY22 performance; Deleveraging and Growth to continue

CMP as of 4th May, 2022
Tata Steel reported a strong Q4FY22 performance which stood largely in line with our estimates.
The company’s revenue increased by 39% YoY and 14% QoQ (in line with our estimate with a CMP (Rs) 1261
slight beat by 1%) but ahead of consensus by 5% at Rs 69,324 Cr. The revenue growth was led Upside /Downside (%) 35%
by higher sales volumes (8.01 MT, +14% QoQ, +2% YoY) and higher steel prices. Segmental High/Low (Rs) 1535/1044
EBITDA stood at Rs 15,174 Cr, up 6% YoY and down 4% QoQ, below our and street’s
Market cap (Cr) 1,54,061
expectations by 4% each. Margins shrank to 21.9% in Q4FY22 from 26.1% in Q3FY22 and
28.6% in Q4FY21, below our expectation of 23.1% and consensus of 23.8%, mainly due to the Avg. daily vol. (6m) Shrs. 84,76,802
higher-than-expected impact of coking coal and raw material prices. PAT stood strong at Rs 9,835 No. of shares (Cr) 122
Cr, up 37% YoY and 2% QoQ, 3% and 4% ahead of our and consensus estimates, primarily led
by lower finance costs and tax expenses. Shareholding (%)
Deleveraging continues: The company’s Net-debt fell more than expected to Rs 51,049 Cr (- Sep-21 Dec-21 Mar-22
33% YoY, -19% QoQ) due to better working capital management. Net-debt/EBITDA now stands at Promoter 34.41 33.92 33.92
only 0.8x vs 6.1x in Mar’20. The company has declared a big Dividend of Rs 51/share which
FIIs 22.38 21.36 22.74
translates into a robust 15% payout ratio. The board has considered the proposal of a stock split
of 1 share of the face value of Rs 10 each into 10 shares of the face value of Re 1 each and is MFs / UTI 10.67 10.51 9.88
subject to regulatory/statutory approvals as well as the approval of the company’s shareholders. Banks / FIs 0.06 0.14 0.11
Segmental performance: Standalone EBITDA increased by 5% YoY and 2% QoQ at Rs 12,363 Others 32.48 34.07 33.35
Cr led by higher volumes, partially offset by higher coking coal prices. TSE EBITDA beat our
estimates and stood strong at Rs 4,349 Cr up 264% YoY and 48% QoQ due to improved sales Financial & Valuations
volume on the back of inventory liquidation and better sales realisation and sales mix. Coal costs Y/E Mar (Rs Cr) FY 23E FY 24E FY 25E
at TSE were offset by lower iron ore prices. crores)
Net Sales 2,40,394 2,21,851 2,03,772
Key Concall Highlights EBITDA 40,481 41,214 41,616
Growth optionality: Tata intends to double its capacity from 19.6mtpa to ~40mtpa mainly Net Profit 18,226 18,837 19,155
through organic expansion in India. The management highlighted a lot of optionalities to put EPS (Rs) 152.8 157.8 160.4
Capex in capital-efficient and value-accretive ways and is a confidant to enhance capacity through PER (x) 8.3x 8.0x 7.9x
internal cashflows without any issuance of debt. Moreover, the Capex intensity will be lower for
P/BV (x) 1.2x 1.1x 1.0x
the brownfield organic projects. The company has sufficient landbank to grow organically, which
gives it the flexibility to pace its Capex outflow in line with the steel cycle. EV/EBITDA (x) 4.7x 4.3x 3.9x
ROE (%) 15% 13% 12%
Steel prices to remain resilient in the near term: The management highlighted structural
changes in the Steel industry as against those in the last decade which would be supportive of
steel prices in the future. A few of these are: 1) China is not adding capacity as it did so in the last Change in Estimates (%)
decade and exports from China will be limited. China’s exports are stuck at ~4-5 MT per month 2) Y/E Mar FY23E FY24E FY25E
Lot of capital is invested to produce green steel pushing the cost of steel production higher
Sales 5% 9% 11%
thereby supporting steel prices, 3) For Tata Steel, the organic growth optionality allows the
company to slowdown on the Capex. Also, the cash flows even in the downcycle will be higher EBITDA -19% -1% 7%
than in the past due to capacity growth in India. 4) On the demand side, as per WSA, world steel PAT -22% 4% 18%
consumption is expected to grow with growth outside China expected to be higher than in China.
In China, EAFs are replacing old blast furnaces thereby limiting capacity addition. 5) The ESG disclosure Score**
management reiterated that leverage will not be the provider of growth.
Environmental Disclosure 25.70
Capital allocation framework: The Management said that it will try to balance the deleveraging,
return to shareholders, and growth Capex. With significant progress on deleveraging, the Social Disclosure Score 13.48
company declared excellent dividend and targeted returns to shareholders in line with the
earnings. It pointed out the need for growth Capex to prioritise the future value of the company Governance Disclosure Score 89.86
and the need to grow capacity by looking at new technology and business model as it brings a lot
more sustainability to Tata steel. It is a confidant of achieving growth along with deleveraging in Total ESG Disclosure Score 43.07
subsequent quarters. Source: Bloomberg, Scale: 0.1-100

Valuation & Recommendation: The stock is currently trading at an attractive valuation of 4.4x **Note: This score measures the amount of ESG data a company reports
publicly, and does not measure the company's performance on any data
12MF EV/EBITDA, below its 10Y average of 6.3x. We reiterate our BUY rating and value the point. All scores are based on 2020 disclosures
company using SoTP by assigning a 1-year forward EV/EBITDA based on its geographical
segments. We ascribe 6.0x, 5.0x and 3.5x multiple to India standalone, other operations (excl
standalone) and Europe on FY24E EBITDA to arrive at a 1-year forward TP of Rs 1,700/share Relative performance
(unchanged from our previous TP), implying an upside potential of 35% from the CMP.
425
Key Financials (Consolidated) 225
(Rs. crores) FY 22A FY 23E FY 24E FY 25E
Net Sales 2,43,959 2,40,394 2,21,851 2,03,772
25
EBITDA 63,490 40,481 41,214 41,616 Jan-20 Aug-20 Mar-21 Oct-21 May-22
Net Profit 40,154 18,226 18,837 19,155
EPS (Rs.) 332.4 152.8 157.8 160.4 Tata Steel BSE Sensex
PER (x) 3.8x 8.3x 8.0x 7.9x
P/BV (x) 1.3x 1.2x 1.1x 1.0x Source: Capitaline, Axis Securities
EV/EBITDA (x) 3.2x 4.7x 4.3x 3.9x
ROE (%) 41% 15% 13% 12%
Source: company, Axis Research
Aditya Welekar
Research Analyst
Email: aditya.welekar@axissecurities.in

1
Results Review
Tata Steel Q4FY22 Results review
vs Axis vs
Q4FY21 Q3FY22 Q4FY22 Q4FY22 Q4FY22 YoY(%) QoQ(%)
Est Consensus
Consens
Actual Actual Axis Est Actual % % % %
us
Total Revenue from
Rs Cr 49,977 60,783 68,737 66,196 69,324 39% 14% 1% 5%
Operations

Total Segment EBITDA Rs Cr 14,290 15,853 15,888 15,774 15,174 6% -4% -4% -4%

EBITDA margin (%) % 28.6% 26.1% 23.1% 23.8% 21.9%

Reported PAT Rs Cr 7,162 9,598 9,580 9,462 9,835 37% 2% 3% 4%

Diluted EPS (Rs) Rs/sh 57.19 79.06 79.16 78.19 79.88 40% 1% 1% 2%

Net Debt Rs Cr 75,388 62,869 62,887 51,049 -32% -19% -19% NA

Source: company, Axis Securities, Bloomberg consensus

Q4FY21 Q3FY22 Q4FY22 YoY QoQ

Segmental EBITDA Actual Actual Actual % %
Tata Steel India Rs Cr 11,722 12,167 12,363 5% 2%
Tata Steel Long Products Rs Cr 506 255 177 -65% -31%
Other Indian operations Rs Cr 458 429 (970) -312% -326%
Tata Steel Europe Rs Cr 1,194 2,942 4,349 264% 48%
Other trade related operations Rs Cr 1,128 (10) (1,264) -212% NA
SE Asian operations Rs Cr 295 230 190 -36% -18%
Rest of the world Rs Cr (179) (325) (122) NA NA
Total Rs Cr 15,124 15,690 14,722 -3% -6%
Less: intersegment eliminations Rs Cr 834 (163) (452) -154% NA
Total segment EBITDA Rs Cr 14,290 15,853 15,174 6% -4%

Production volume:
Tata Steel India Mnt 4.56 4.64 4.73 4% 2%
Tata Steel Europe Mnt 2.66 2.57 2.31 -13% -10%
Tata Steel Thailand Mnt 0.39 0.32 0.34 -13% 6%
Delivery volumes:
Tata Steel India Mnt 4.50 4.25 4.97 10% 17%
Tata Steel Europe Mnt 2.47 2.16 2.40 -3% 11%
Tata Steel Thailand Mnt 0.37 0.32 0.34 -8% 6%
Source: company, Axis Securities

2
Key Concall Highlights

 Coking coal consumption costs increased in Q4FY22 at TSE by €50/tonne and at India by $50/tonne compared to the previous
quarter. In Q1FY23, the company expects the coking coal consumption costs to rise further by €50-60 at TSE and by $100/tonne in India
as against Q4FY22. The Cost increase in Q1 can be covered by price increases in both India and Europe.
 Net sales realisation (NSR) Increase in Q1FY23: In India, NSR is expected to increase by Rs 8,000-8,500 per tonne higher than in
Q4FY22. In Europe, NSR is expected to increase by €60 per tonne QoQ. In Europe the contracted prices in Nov’21 and Dec’21 are in
Auto and packaging contracts are actually higher than the spot prices of January, but now the spot prices are also gone up, as a result,
currently, both the spot and contracted prices are close to each other. Spot prices were expected to be less than the contracted prices. If
spot prices drop the uncontracted portion of sales volume will be exposed. In Netherlands, 60-70% mix is on LT contract. In UK 40% on
LT prices and in India 20-30% contracts (largely on Auto contracts), are getting negotiated for 1H.
 Guidance on sales in FY23: The company expects 0.5 MT incremental sales volume (without NINL), the incremental sales will come
through debottlenecking, focus will also be on enriching the sales mix by using value accretive segments. It expects to start the 1mtpa
NINL steel plant post it gets the ownership of NINL (acquisition to close in 1QFY23), and production is expected to start by the end of
FY23.
 Energy cost: In Europe, ~90% of the energy costs were hedged in Q4. In Q1FY23, ~75%-80% of the cost is hedged. Given hedging and
the cost which has already come through in Q4, the company does not see a significant impact in Q1 from the elevated energy costs.
 Long products growth: The EAF led growth for the long products portfolio will be less capital intensive as the company has partners
who are willing to set up these facilities, as the company can leverage its brand and distribution network.
 Inorganic growth opportunities: The company has not dismissed the inorganic growth option (NMDC Nagarnar steel plant and RINL),
however, the base plan is to focus on brownfield organic growth projects as it offers more optionality, paybacks are much better and it can
be paced.
 European steel Demand: Demand in Europe except for the auto sector (chip shortage) is strong, and the demand-supply balance is not
disrupted due to the supply-side issues from Ukraine and Russia.
 Coal shortage in India: The company imports mainly Metallurgical coal so no impact on the coking coal front. However, the DRI
operations at Bhushan steel and at Tata steel long products company purchases thermal coal, and there will be a challenge but no impact
on production. Due to the coal shortage, the company is not seeing the impact on demand as some of the customers are impacted, but
some producers are also impacted as both are dependent on the power supply.
 company structure simplification: Tata steel long products (TSLP) merger with Tata steel - restriction on TSLP to do any corporate
actions as TSLP is the bidder for NINL.
 Relining of Blast furnace (BF) at Tata steel Netherlands: The company is building slab stocks to feed its downstream facilities as the
BF6 is due for a reline for next year. The slab stocks will be the feedstock for downstream facilities once the furnace goes for
maintenance, thereby insulating volume impact. The slab stock is currently blocking working capital in Europe but will be released once it
gets consumed next year. TheBF7 is to be transitioned to gas that needs to be reconciled with a gas situation in Europe, the company will
take that call as it is working closely with the local government, and as the gas becomes available, the company will come back on
timelines as more clarity emerges.
 Transition to Green steel in Europe: In the Netherlands, a transition from coal to gas to hydrogen is planned, however, with the Ukraine
crisis, the availability of gas is an issue. Netherlands depends on ~30-40% of its gas requirement from Russia. Cash flow from the
Netherlands will be used to support the transition to hydrogen. In the UK, making better use of scrap, as the UK exports scrap, the
government support is needed for this transition and the conversation is going on with the government.
 Carbon costs in Europe: In Europe, there is a mechanism, whereby the company gets a free carbon allowance by the government
based on average production over the last three years, as far as Netherlands is concerned the company produces ~6.9mt liquid steel
emitting 12mt of Carbon, the allocation is upto 10mt, the gap of 2-2.3mt is purchased from the market. Last year’s EU ETS price went up
to €80 per tonne. In Europe, the company expects a total gap of ~2mt in the Netherlands and in the UK, which is to be purchased from
the market. By 2030, the company plans to bring down the external purchase using decarbonisation.
 Cutting ties with Russia: Being a global company with global ties and footprints, and with its long term procurement contract already in
place, Tata steel decided to cut ties with Russia.

3
Exhibit 1: Tata Steel SoTP valuation Exhibit 2: HRC Prices India and Europe ($/tonne)

FY24E EBITDA EV/EBITDA (x) FY24 EV 1,700

India Standalone (Inc TSBSL) 33,094 6.0x 1,98,566 N Europe S Europe India
1,500
Europe 8,276 3.5x 28,967
Other Operations -157 5.0x (785) 1,300
Total EV 41,214 5.5x 2,26,748
1,100
Less: Net Debt FY23E 33,847
Add: CWIP (0.5 x Book value) 14,384 900
Equity Value 2,07,285
700
No of Shares (Cr) 122
Target Price (Rs/sh) 1,697 500

Apr-21

Oct-21
Nov-21
Dec-21

Apr-22
Aug-21
Sep-21
Jan-21

Jun-21

Jan-22
May-21
Feb-21
Mar-21

Jul-21

Feb-22
Mar-22
CMP 1,261
% Upside 35%

Source: Bloomberg, Axis Securities

Exhibit 3: Tata Steel Expansion plan to 40mtpa

Source: company presentation

4
Financials (Consolidated)
Profit & Loss (Rs Cr)
Y/E March FY 22A FY 23E FY 24E FY 25E

Total Operating income 2,43,959 2,40,394 2,21,851 2,03,772

Total Expenditure 1,80,469 1,99,913 1,80,637 1,62,156

EBITDA 63,490 40,481 41,214 41,616
Depreciation and Amortization 9,101 9,543 10,136 10,749
EBIT 54,389 30,938 31,077 30,867

Other Income 785 824 865 909

Share Of P/L Of Associates (Net of Tax) 649 682 716 751
Less: Interest & Fin Chg. 5,462 4,404 3,679 3,058
Less: Exceptional Items 134 - - -
Profit before tax 50,227 28,040 28,980 29,469
Provision for Tax 8,478 9,814 10,143 10,314
Reported PAT 41,749 18,226 18,837 19,155
Minority Interest 1,595 - - -
Attributable PAT 40,154 18,226 18,837 19,155

EPS (Rs/sh) Basic 332.4 152.8 157.8 160.4

DPS (Rs/sh) 51.0 25.0 25.0 25.0
Source: company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY 22A FY 23E FY 24E FY 25E
Net Block 1,16,166 1,19,373 1,21,987 1,24,838
Other Tangible assets 8,338 8,338 8,338 8,338
CWIP + ITUD + Other Intangible Assets 26,518 28,768 31,018 33,418
Goodwill 4,311 4,527 4,753 4,991
Investments 13,140 13,649 14,183 14,744
Inventories 48,824 48,111 44,400 40,782
Trade Receivables 12,246 12,067 11,137 10,229
Cash / Bank balance 15,605 14,737 18,611 22,420
Retirement Benefit Assets 20,399 20,807 21,223 21,648
Misc. Assets 19,898 20,667 21,472 22,316
Total assets 2,85,446 2,91,044 2,97,122 3,03,723

Equity capital 1,221 1,221 1,221 1,221

Hybrid Perpetual Securities/ Share warrants - - - -
Reserves 1,13,222 1,28,395 1,44,179 1,60,280
Minority Interests 2,655 2,655 2,655 2,655
Total Borrowings 68,829 57,829 48,829 39,829
Def tax Liabilities 12,326 12,326 12,326 12,326
Retirement Benefit Obligations 3,572 3,751 3,938 4,135
Provisions 7,594 7,974 8,373 8,792
Trade Payables 36,765 36,228 33,433 30,709
Other Liabilities and Provision 39,261 40,666 42,168 43,777
Capital employed 2,85,446 2,91,044 2,97,122 3,03,723
Source: company, Axis Securities

5
Cash Flow (Rs Cr)
Y/E March FY 22A FY 23E FY 24E FY 25E
Profit before tax 50,227 28,040 28,980 29,469
Depreciation 9,101 9,543 10,136 10,749
Interest Expenses 5,462 4,404 3,679 3,058
Non-operating / EO item 1,110 (600) (618) (636)
Change in W/C (9,618) 1,562 3,145 3,196
Income Tax (11,902) (9,814) (10,143) (10,314)
Operating Cash Flow 44,381 33,135 35,179 35,522
Capital Expenditure (10,522) (15,000) (15,000) (16,000)
Free cash Flow 33,859 18,135 20,179 19,522
Other Investments (359) (724) (761) (799)
Investing Cash Flow (10,881) (15,724) (15,761) (16,799)
Proceeds from issue of Equity shares 326 - - -
Proceeds / (Repayment) of Borrowings (15,231) (11,000) (9,000) (9,000)
Finance cost paid (4,687) (4,404) (3,679) (3,058)
Dividend paid (3,020) (3,053) (3,053) (3,053)
Other Financing activities (789) 179 188 197
Financing Cash Flow (23,401) (18,279) (15,544) (14,914)
Change in Cash 10,099 (868) 3,874 3,809
Opening Cash 5,532 15,605 14,737 18,611
Closing Cash 15,605 14,737 18,611 22,420
Source: company, Axis Securities

Ratio Analysis (x) / (%)

Y/E March FY 22A FY 23E FY 24E FY 25E
Operational Ratios
Sales growth (% YoY) 56% -1% -8% -8%
EBITDA growth (% YoY) 108% -36% 2% 1%
Op. profit growth (% YoY) 156% -43% 0% -1%
Net Profit growth (% YoY) 436% -55% 3% 2%
EBITDA Margin % 26% 17% 19% 20%
Net profit Margin % 16% 8% 8% 9%
EBITDA/t (Rs/tonne) 0% 0% 0% 0%
Tax Rate % 17% 35% 35% 35%
Efficiency Ratios
Total Asset turnover (x) 0.92 0.83 0.75 0.68
Sales/Gross block (x) 1.25 1.17 1.02 0.88
Sales/Net block(x) 2.07 2.04 1.84 1.65
Working capital/Sales (x) 0.10 0.10 0.10 0.10
Valuation Ratios
PER (x) 3.8x 8.3x 8.0x 7.9x
P/BV (x) 1.3x 1.2x 1.1x 1.0x
EV/Ebitda (x) 3.2x 4.7x 4.3x 3.9x
EV/Sales (x) 0.8x 0.8x 0.8x 0.8x
Dividend Yield (%) 4.0% 2.0% 2.0% 2.0%
Return Ratios
ROE 0.41 0.15 0.13 0.12
ROCE 0.29 0.16 0.15 0.14
ROIC 0.28 0.12 0.12 0.12
Leverage Ratios
Debt / equity (x) 0.61 0.45 0.34 0.25
Net debt/ Equity (x) 0.47 0.27 0.15 0.05
Net debt/Ebitda (x) 0.71 0.84 0.50 0.17
Interest Coverage ratio (x) 11.62 9.19 11.20 13.61
Source: company, Axis Securities

6
 Tata Steel Price Chart and Recommendation History

(Rs)

Date Reco TP Research

06-Apr-22 BUY 1,700 Initiating Coverage
05-May-22 BUY 1,700 Results Update
Source: Axis Securities

7
About the analyst

Analyst: Aditya Welekar

Email: aditya.welekar@axissecurities.in

Sector: Metals & Mining

Analyst Bio: Aditya Welekar is PGDBM in Finance with 10 years of experience in Equity Market/Research.

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8
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability
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described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors.

The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of
the views expressed in the report. The company reserves the right to make modifications and alternations to this document as may be required from time to time
without any prior notice. The views expressed are those of the analyst(s) and the company may or may not subscribe to all the views expressed therein.
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