HOLD

Results Update Tata Steel Target Price

26th July 2023 Steel 125

Weak European Operations Pose Near-Term Pain

(CMP as of 25th July 2023)
Est. Vs. Actual for Q1FY24: Revenue – BEAT; EBITDA – BEAT; PAT – MISS CMP (Rs) 119.2
Growth Estimates YoY post Q1FY24: Upside /Downside (%) 4%
FY24E/FY25E: Revenue 1%/0%; EBITDA: -15%/4%; PAT (Attributable): -27%/8% High/Low (Rs) 124/94
Recommendation Rationale Market cap (Cr) 1,45,679
 Enhancing Indian footprint: The volume-accretive new 5mtpa blast furnace will come online Avg. daily vol. (6m) Shrs. 40,606,285
by Mar’24. The value-accretive CRM and pellet plants have already started contributing. The No. of shares (Cr) 1,222
company maintained its guidance of incremental 1.5MT steel production for FY24 YoY and
Kalinaganagar SMS and NINL would be key contributors to the same. From FY26, the volume Shareholding (%)
impact will be more significant.
Dec-22 Mar-23 Jun-23
 Spreads likely to remain flat QoQ in Q2FY24: The benefit of the lower coking coal spot
Promoter 33.9 33.9 33.9
prices is expected to accrue in Q2FY24, but realisations are expected to decline QoQ in both
India and Europe. In Europe, the benefit of the drop in gas prices is not yet accrued as the FII 21.9 20.6 20.3
prices are hedged (benefit likely post-Q2FY24 onwards). EBITDA/t at both India and Europe is Mutual Funds / UTI 8.2 9.1 8.9
expected to remain flat QoQ in Q2FY24. Financial Institutions 0.1 0.1 0.2
 Tata Steel UK Upstream assets nearing their end of life over the next 12-24 months: The
Others 36.0 36.3 36.7
management said it is in talks with the UK government for the asset restructuring support
(decisive action expected in H2FY24). Netherland’s relining will be completed by early Q3FY24 Financial & Valuations
and it will be EBITDA/cash positive in H2FY24.
Y/E Mar (Rs Cr) FY 24E FY 25E FY 26E
Sector Outlook: Cautious Net Sales 2,36,913 2,31,638 2,48,954
Company Outlook & Guidance: Realisations in India will be lower by Rs 3,100/t QoQ, while in EBITDA 29,158 31,396 36,444
Europe, it will drop by £38/t QoQ in Q2FY24. Coking coal consumption cost to decline by $57/t in Net Profit 9,157 10,755 13,747
India and $46/t in Europe QoQ in Q2FY24. FY24 Capex guidance stands unchanged at Rs 16,000
Cr and FY24 deliveries are to increase by 1.5MT YoY. The company maintained its deleveraging EPS (Rs.) 7.5 8.8 11.3
target of $1 Bn per annum and Net Debt/EBITDA target at 2.0x-2.5x. PER (x) 15.9x 13.5x 10.6x

Current Valuation: SoTP using 1YFwd EV/EBITDA for India, Europe and Others at 6.4x, 3.5x, 5.0x P/BV (x) 1.3x 1.2x 1.1x
on FY25 EBITDA (unchanged) EV/EBITDA (x) 7.3x 6.6x 5.5x
Current TP: Rs 125/share (From Rs 120/sh) ROE (%) 8% 9% 11%

Recommendation: We maintain our HOLD rating on the stock on account of the overhang of the
Change in Estimates (%)
restructuring of UK assets.
Y/E Mar FY23 FY24E FY25E
Financial Performance:.Tata Steel reported a weak set of numbers as was largely expected.
Sales 0% 1% 0%
Consolidated revenue declined by 6% YoY/QoQ each (4% beat) led by lower sales volumes
partially offset by higher realisations across geographies. Consolidated EBITDA at Rs 5,174 Cr Adj EBITDA 0% -15% 4%
declined by 65%/28% YoY/QoQ (10% beat) on lower topline and higher costs. Indian EBITDA/t PAT (Attrib) 0% -27% 8%
stood down 43%/14% YoY/QoQ as higher realisations were offset by higher coking coal costs.
European EBITDA/t loss continued in the quarter at $96/t vs a loss of $92/t in Q4FY23 ($365/t profit ESG disclosure Score**
in Q4FY23). Underlying PAT excluding one-time gain on BluScope JV, stood down by 96%/83% Environmental Disclosure 60.77
YoY/QoQ at Rs 283 Cr.
Social Disclosure Score 25.73
Outlook: Indian operations are robust while margins in Europe will improve gradually, led by lower Governance Disclosure Score 89.86
gas/coal prices and as relining of the blast furnace at TSN progresses. TSK phase II will be both
Total ESG Disclosure Score 58.83
value and volume-accretive but full benefit from the volume growth is likely from FY26 onwards.
Increasing Indian footprint and decisive resolution of the UK assets are the key triggers for the stock Sector Average 50.39
in the medium term. In the short term, the profitability is likely to be impacted on account of weaker Source: Bloomberg, Scale: 0.1-100
European operations. Steel prices will be decided by the Chinese supply discipline in H2FY24 (flat **Note: This score measures the amount of ESG data a company reports
publicly and does not measure the company's performance on any data
control policy where it will keep the steel production flat YoY in CY23) and stimulus expectations. point. All scores are based on 2022 disclosures, Sector average is for
The Chinese property sector continues to remain weak, capping the upside to steel prices so far. NSE500 companies

Valuation & Recommendation: We value the company using SoTP and ascribe 1-year Fwd Relative performance
EV/EBITDA multiple of 6.4x, 5.0x, and 3.5x to India standalone, other operations (excl standalone),
130
and Europe on FY25 EBITDA to arrive at a 1-year forward TP of Rs 125 (Rs 120 earlier). The TP
implies an upside potential of 4% from the CMP. We maintain our HOLD rating on the stock. 110

Key Financials (Consolidated) 90

70
(Rs Cr) Q1FY24 QoQ (%) YoY (%) Axis Est. Variance
50
Net Sales 59,490 -6% -6% 57,240 4% Jan-22 Jul-22 Jan-23 Jul-23
EBITDA 5,174 -28% -65% 4,694 10% Tata Steel Ltd. BSE Sensex
Adj EBITDA/t 8,664 -7% -60% 6,671 30%
Source: Ace Equity, Axis Securities
Underlying Net Profit 283 -83% -96% 382 -26%
EPS (Rs) 0.2 -83% -96% 0.31 -26%

Source: Company, Axis Research

Aditya Welekar
Sr. Research Analyst
Email: aditya.welekar@axissecurities.in

1
Key Concall Highlights

 Spreads likely to remain flat or could marginally improve QoQ in Q2FY24: At India, domestic demand is
supportive, however, the drop in international prices and seasonality has dampened prices. Realization at India to
drop QoQ in Q2FY24 by Rs 3100/t. But, coking coal consumption cost is expected to come down by $57/t QoQ in
Q2FY24. In Q1 it was $10/t higher QoQ both in Europe and India. In Europe, net realization is expected to drop by
£38/t QoQ in Q2FY24, while coking coal consumption cost is likely to drop by $46/t. Ongoing relining at one of the
BFs in the Netherlands will continue in Q2 which will keep costs elevated in Q2. Drop in spot natural gas prices will
take a quarter to hit in P&L as the company has hedges in place.

 Incremental volume guidance for FY24 is maintained: In FY24, the company has maintained its guidance of
~1.5Mt higher steel deliveries YoY on a consolidated basis. At the Kalinganagar, the CRM and pellet plant has
already started working. Galvanizing and annealing lines will commission over the next few quarters. The BF is
expected to come online by Feb-Mar’24. It will ramp up fast and will contribute to volumes in FY25 (not given any
specific guidance).

 Capex: Company spent a total capex of Rs 4,089 Cr in Q1FY24. Total capex guidance for FY24 is maintained at
Rs 16,000Cr; the majority will be towards Kalinganahgar expansion in India (Rs 11,000 Cr). The company’s focus
is on Prioritizing growth in India.

 Working Capital: The volatility in steel prices impacted WC. In Q1FY24, there was a WC buildup of Rs 2,500 Cr,
however, this is more due to price effects as the WC no of days remained stable at 34 days vs 37 days in Q4FY23.
In the last 12 months, the company has released ~Rs 9,200 Cr through WC management.

 Deleveraging: The WC buildup and cash flows on account of higher capex have led to an increase in Net debt by
~Rs 3,600 Cr on a QoQ basis to Rs 71,397 Cr. Finance cost was broadly stable on a QoQ basis. Net debt to
EBITDA stood at 2.9x and Net debt to Equity was at 0.69x. The Group liquidity stood strong at Rs 30,500 Cr
including Rs 19,000 Cr of C&CE. Management said its goal is to achieve $1 Bn deleveraging YoY, however, the
European operations could require support for decarbonisation and sustenance, which will require higher capital
allocations. However, the company will broadly maintain its Net Debt/EBITDA in the range of 2.0-2.5x.

 Tata Steel UK: Downstream UK assets are operating fine, while upstream assets are reaching their end of the line
in the next 12-24 months. Management said they will reach a decisive position towards its talks with the UK
government regarding the decarbonisation plan.

 Tata Steel Netherlands: The plan is to transition away from BF to DRI-based production with an EAF to support it.
Management said they had a detailed conversation with the Netherlands government and a lot of work is already
done. Also, the Netherlands has internal cash flow support as its operations are expected to contribute positive
cash flows from H2FY24 post the relining is over by early Q3FY24.

 BlueScope JV: The reported PAT includes a one-time gain of Rs 338 Cr in other income on fair valuation transfer.
This is on account of synergies related to a long-term agreement with Tata BlueScope with respect to the use of
Tata Steel’s downstream assets for the production of colour-coated lines at Angul and Khopoli. The JV will be
accounted as lease assets on Tata's Steel’s balance sheet. Going forward, in other income the company will
recognise lease and capital charges and the margin on the leased assets which will be much smaller than the one-
time gain in Q1FY24 from the fair valuation transfer.

Key Risks to our Estimates and TP

 The key risk to our HOLD rating is the increase in HRC prices in China (higher than our assumption), which could
lead to higher prices in the rest of the world.

 Lower coking coal costs than our assumptions.

Change in Estimates
New Old % Change
FY23A FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Sales 2,43,353 2,36,913 2,31,638 2,43,353 2,33,473 2,30,788 0% 1% 0%

EBITDA 32,300 29,158 31,396 32,300 34,239 30,241 0% -15% 4%

PAT (Attrib) 8,760 9,157 10,755 8,760 12,460 10,004 0% -27% 8%
Source: Company, Axis Securities

2
Tata Steel Q1FY24 Results Review
Consolidated Q1FY23 Q4FY23 Q1FY24 Q1FY24 Q1FY24 YoY(%) QoQ(%) vs Axis Est vs Consensus

Actual Actual Axis Est Consensus Actual % % % %

Total Revenue from Operations Rs Cr 63,430 62,962 57,240 56,674 59,490 -6% -6% 4% 5%

EBITDA Rs Cr 14,973 7,219 4,694 5,072 5,174 -65% -28% 10% 2%

Adj EBITDA per tonne Rs/tonne 21,661 9,288 6,671 8,664 -60% -7% 30% NA

EBITDA margin (%) % 23.6% 11.5% 8.2% 8.9% 8.7%

Underlying Attrib PAT Rs Cr 7,804 1,693 382 283 -96% -83% -26% NA

Reported PAT (Attrib) Rs Cr 7,765 1,705 382 270 634 -92% -63% 66% 135%

Underlying Diluted EPS (Rs) Rs/sh 6.39 1.39 0.31 0.23 -96% -83% -26% NA

Reported Diluted EPS (Rs) Rs/sh 6.36 1.40 0.31 0.52 -92% -63% 66% NA

Net Debt Rs Cr 54,504 67,810 71,397 31% 5% NA NA

Source: Company, Axis Securities, Bloomberg Consensus

Q1FY23 Q4FY23 Q1FY24 YoY(%) QoQ(%)

Segmental EBITDA Actual Actual Actual % %

Tata Steel India Rs Cr 9,616 8,089 7,348 -24% -9%

Tata Steel Long Products Rs Cr (34) 1.49 166 NA 11039%

Other Indian operations Rs Cr 344 548 230 -33% -58%

Tata Steel Europe Rs Cr 6,037 (1,641) (1,569) NA NA

Other trade related operations Rs Cr (587) 355 (13) NA NA

SE Asian operations Rs Cr 303 64 54 -82% -15%

Rest of the world Rs Cr (36) (130) 27 NA NA

Total Rs Cr 15,643 7,286 6,243 -60% -14%

Less: intersegment eliminations Rs Cr 595 61 121 -80% 99%

Total segment EBITDA Rs Cr 15,047 7,225 6,122 -59% -15%

Source: Company, Axis Securities

Q1FY23 Q4FY23 Q1FY24 Q1FY24 YoY(%) QoQ(%) vs Axis Est

Production volume: Actual Actual Axis Est Actual % % %

Tata Steel India Mnt 4.99 5.22 5.01 5.08 2% -3% 1%

Tata Steel Europe Mnt 2.44 2.27 1.81 1.79 -27% -21% -1%

Tata Steel Thailand Mnt 0.31 0.31 0.26 0.26 -16% -16% 0%

Total Consolidated Mnt 7.74 7.80 7.08 7.13 -8% -9% 1%

Delivery volumes:

Tata Steel India Mnt 4.17 5.31 4.80 4.94 18% -7% 3%

Tata Steel Europe Mnt 2.14 2.16 1.97 1.99 -7% -8% 1%

Tata Steel Thailand Mnt 0.31 0.31 0.27 0.27 -13% -13% 0%

Total Consolidated Mnt 6.62 7.78 7.04 7.20 9% -7% 2%

Adj EBITDA per tonne Europe Rs/t 28,220 -7,610 -6,742 -7,890 -128% NA 17%

Adj EBITDA per tonne Europe $/t 366 -93 -82 -96 -126% NA 17%

Adj EBITDA per tonne India Rs/t 21,326 16,719 13,771 16,014 -25% -4% 16%

Adj EBITDA per tonne Consolidated Rs/t 21,661 9,288 6,671 8,664 -60% -7% 30%

Source: Company, Axis Securities

3
Financials (Consolidated)
Profit & Loss (Rs Cr)
Y/E March FY 22A FY 23A FY 24E FY 25E

Total Operating income 2,43,959 2,43,353 2,36,913 2,31,638

Total Expenditure 1,80,469 2,11,053 2,07,755 2,00,241

EBITDA 63,490 32,300 29,158 31,396
Depreciation and Amortization 9,101 9,335 9,939 10,523
EBIT 54,389 22,965 19,219 20,873

Other Income 785 1,037 1,089 1,144

Share Of P/L Of Associates (Net of Tax) 649 418 439 461
Less: Interest & Fin Chg. 5,462 6,299 6,660 5,933
Less: Exceptional Items 134 (113) - -
Profit before tax 50,227 18,235 14,088 16,545
Provision for Tax 8,478 10,160 4,931 5,791
Reported PAT 41,749 8,075 9,157 10,755
Minority Interest 1,595 (685) - -
Attributable PAT 40,154 8,760 9,157 10,755

EPS (Rs/sh) Basic 332.4 7.2 7.5 8.8

DPS (Rs/sh) 51.0 3.6 2.5 2.5

Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY 22A FY 23A FY 24E FY 25E
Net Block 1,16,166 1,18,697 1,22,358 1,22,884
Other Tangible assets 8,338 9,223 9,223 9,223
CWIP + ITUD + Other Intangible Assets 26,518 44,314 46,714 48,664
Goodwill 4,311 5,602 5,882 6,176
Investments 13,140 8,410 8,669 8,941
Inventories 48,824 54,415 52,975 51,796
Trade Receivables 12,246 8,257 8,039 7,860
Cash / Bank balance 15,605 12,130 13,225 19,432
Retirement Benefit Assets 20,399 6,991 7,131 7,273
Misc. Assets 19,898 19,984 20,767 21,589
Total assets 2,85,446 2,88,022 2,94,982 3,03,837

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

Hybrid Perpetual Securities/ Share warrants - - - -
Reserves 1,13,222 1,01,861 1,07,965 1,15,666
Minority Interests 2,655 2,093 2,093 2,093
Total Borrowings 68,829 78,018 78,018 78,018
Def Tax Liabilities 12,326 14,116 14,116 14,116
Retirement Benefit Obligations 3,572 3,094 3,249 3,411
Provisions 7,594 8,659 9,091 9,546
Trade Payables 36,765 37,833 36,831 36,011
Other Liabilities and Provision 39,261 41,128 42,398 43,754
Capital employed 2,85,446 2,88,022 2,94,982 3,03,837
Source: Company, Axis Securities

4
Cash Flow (Rs Cr)
Y/E March FY 22A FY 23A FY 24E FY 25E
Profit before tax 50,227 18,235 14,088 16,545
Depreciation 9,101 9,335 9,939 10,523
Interest Expenses 5,462 6,299 6,660 5,933
Non-operating / EO item 1,110 (2,961) (364) (378)
Change in W/C (9,618) (3,707) 1,801 1,763
Income Tax (11,902) (5,519) (4,931) (5,791)
Operating Cash Flow 44,381 21,683 27,192 28,595
Capital Expenditure (10,522) (14,142) (16,000) (13,000)
Free cash Flow 33,859 7,541 11,192 15,595
Other Investments (359) (4,537) (539) (566)
Investing Cash Flow (10,881) (18,680) (16,539) (13,566)
Proceeds from the issue of Equity shares 326 1 - -
Proceeds / (Repayment) of Borrowings (15,231) 5,428 - -
Finance cost paid (4,687) (6,120) (6,660) (5,933)
Dividend paid (3,020) (6,293) (3,053) (3,053)
Other Financing activities (789) 2 155 162
Financing Cash Flow (23,401) (6,981) (9,558) (8,823)
Change in Cash 10,099 (3,977) 1,095 6,206
Opening Cash 5,532 15,607 12,130 13,225
Closing Cash 15,607 12,130 13,225 19,432
Source: Company, Axis Securities

Ratio Analysis (%)

Y/E March FY 22A FY 23A FY 24E FY 25E
Operational Ratios
Sales growth (% YoY) 56% 0% -3% -2%
EBITDA growth (% YoY) 108% -49% -10% 8%
Op. profit growth (% YoY) 156% -58% -16% 9%
Net Profit growth (% YoY) 436% -78% 5% 17%
EBITDA Margin % 26% 13% 12% 14%
Net profit Margin % 16% 4% 4% 5%
EBITDA/t (Rs/tonne) 0% 0% 0% 0%
Tax Rate % 17% 56% 35% 35%
Efficiency Ratios
Total Asset Turnover (x) 0.92 0.85 0.81 0.77
Sales/Gross block (x) 1.27 1.24 1.13 1.04
Sales/Net block(x) 2.07 2.07 1.97 1.89
Working capital/Sales (x) 0.10 0.10 0.10 0.10
Valuation Ratios
PER (x) 4.0x 16.6x 15.9x 13.5x
P/BV (x) 1.4x 1.4x 1.3x 1.2x
EV/Ebitda (x) 3.4x 6.7x 7.3x 6.6x
EV/Sales (x) 0.9x 0.9x 0.9x 0.9x
Dividend Yield (%) 3.9% 3.0% 2.1% 2.1%
Return Ratios
ROE 0.41 0.08 0.08 0.09
ROCE 0.29 0.12 0.10 0.10
ROIC 0.27 0.06 0.07 0.08
Leverage Ratios
Debt / equity (x) 0.66 0.82 0.78 0.73
Net debt/ Equity (x) 0.53 0.61 0.61 0.52
Net debt/Ebitda (x) 0.80 2.07 2.28 1.91
Interest Coverage ratio (x) 11.62 5.13 4.38 5.29
Source: Company, Axis Securities

5
 Tata Steel Price Chart and Recommendation History

(Rs)

Source: Axis Securities

Date Reco TP Research

05-Apr-22 BUY 170 Initiating Coverage
04-May-22 BUY 170 Result Update
25-May-22 BUY 139 Sector Update
26-Jul-22 HOLD 104 Result Update
19-Sep-22 HOLD 115 Sector Update
01-Nov-22 HOLD 110 Result Update
21-Nov-22 BUY 117 Sector Update
08-Feb-23 HOLD 120 Result Update
04-May-23 HOLD 120 Result Update
27-July-23 HOLD 125 Result Update

Source: Axis Securities

6
About the analyst

Analyst: Aditya Welekar

Email: aditya.welekar@axissecurities.in

Sector: Metals & Mining

Analyst Bio: Aditya Welekar is PGDBM in Finance with 12 years of experience in Equity Market/Research.

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7
 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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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 or use would
be contrary to law, regulation or which would subject ASL to any registration or licensing requirement within such jurisdiction. The securities 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.
Copyright in this document vests with Axis Securities Limited.
Axis Securities Limited, SEBI Single Reg. No.- NSE, BSE & MSEI – INZ000161633, ARN No. 64610, CDSL-IN-DP-CDSL-693-2013, SEBI-Research Analyst Reg. No.
INH 000000297, SEBI Portfolio Manager Reg. No.- INP000000654, Main/Dealing off.- 1st Floor, I-Rise Building, Q Parc, Loma Park, Thane, Ghansoli, Navi Mumbai-
400701, Regd. off.- Axis House,8th Floor, Wadia International Centre, PandurangBudhkar Marg, Worli, Mumbai – 400 025. Compliance Officer: AnandShaha, Email:
compliance.officer@axisdirect.in, Tel No: 022-49212706

NEERAJ Digitally signed by NEERAJ

CHADAWAR
CHADAWAR Date: 2023.07.26 08:19:46 +05'30'
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