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Chance to pare down debt for good

Tata Steel’s (Tata) management led with a commentary on structural shift in commodity markets and higher through cycle steel prices. What’s impressive though is that capex program hasn’t drawn confidence from the same and has been restricted to Rs130-155bn p.a. for the next 5 years. Management has also suggested the new ND to EBITDA target of 2x through cycle – FY22E being much lower. Management clarified that 2x is upper bound and will be tested only if anything meaningfully attractive (mostly inorganic) comes to notice. Throughcycle RoIC has been targeted at 15%+; additional filter of 12%+ carbon cost adjusted IRR for project capex has been put in place; capex is also being directed to downstream value addition of 4.6mtpa – some more commentary on expected capex and RoIC on the same would have further helped the narrative, in our view. We maintain HOLD with a revised target price of Rs1,108 (earlier: Rs1,020).

Targeted capacity addition; 40mtpa by CY30.

Across three sites, capacity can be ramped up to 40mtpa, which includes 15mtpa organic/inorganic capex. Long product portfolio has been targeted at 10mtpa from 4mtpa which in our view would increase Tata Steel’s long product (TSLP) capacity to ~6mtpa (by 2030) -- lot of focus is to increase EAF capacity in an asset-light manner -- also fits in Tata's sustainability goal. Capex has been restricted to Rs100-120bn p.a. for India and Rs35bn p.a. for Europe (includes capex for low carbon transition. Rs5-6bn p.a. spend (capital + revenue) has been allocated to R&D). This may lead to commercialisation. Also, the company is currently dealing with 300 startups across 9 geographical areas and 25 proof of concepts.

Future investment focus.

Nearly 82% of investments in India is prioritised towards growth, ~65% of investments in Europe is towards sustenance & environment and 12% is the carbon adjusted project IRR threshold for capital allocation (internal carbon cost allocated to projects). Capital allocation focuses on completing Kalinganagar expansion @US$640/te (Phase 2) and investment in RM expansion to increase capacity to 50mtpa @35/te. 40mtpa India steel capacity by CY30 (20mtpa flats and 10mtpa longs) will contribute to 73% of global capacity (as against 57% in CY20). This is followed by investments in EAF, along with new materials as well as to expand downstream portfolio in India by 4.6mtpa (CR, tubes, wires and tinplates).

Continue to focus and invest in capabilities to attain leadership position in adjacent businesses.

Services and solutions as well as new material are now expected to contribute around 10-12% to topline by CY30. Home building platform Aashiyana witnessed 130% YoY growth to reach sales of Rs7.3bn in FY21; management expects sales to double again YoY. Choice of entry as well as R&D into new materials has been driven by market size, profitability, absence of Chinese competition and indigenous R&D inputs (for Graphene). Management expects each of these business lines to clock Rs30-40bn in the next 5 years.

ND/EBITDA capped at 2x.

It’s an improvement from the past prints and the past through cycle guidance. There is no urgency to disrupt the glide path of deleveraging. Through cycle EBITDA estimates and capex guidance still highlight a good deleveraging possibility and 2x ND/EBITDA (through cycle) can only be tested if there is a big inorganic investment. Tata’s dividend yield is also expected to increase. The only risk we could perceive from the presentation is whether BF will be witnessing additional carbon costs in India as well? Perhaps that guides carbon adjusted IRR calculations.

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