Buy Tata Steel Ltd For Target Rs.510 - HDFC Securities
Tata Steel Group is among the top global steel companies with an annual crude steel capacity of 33 million tonnes per annum (MnTPA). The company’s Indian operations enjoy highest EBITDA/t in the industry due to captive iron ore mines and better product mix. India has become world’s second largest steel producing country after China with crude steel production of 111.2 million tonnes in 2019. The World Steel Association (WSA) forecasts steel demand to decline 6.4% YoY to 1654 MnT in CY 2020, due to COVID-19 impact, however it has asserted that global steel demand could rebound to 1717 MnT in CY 2021. Going forward, we believe steel demand could improve on the back of revival in the economy post COVID-19, Government’s continuous thrust on infrastructure development, revival in the capex cycle One of the designated core industries, steel is the key to the government’s focus on driving growth in the infrastructure segment and government has taken many initiatives such as imposing anti-dumping duty, Steel Import Monitoring System (SIMS), imposing export duty on iron ore etc. We believe that going forward the recent price hikes in steel prices are sustainable and Tata Steel India operations is likely to do well as capacity utilization level improves and ramp up of production at Bhushan Steel happens. We expect European operations will continue to face headwinds but it can surprise on the positive side with any news on divestment/ partnership or support from the UK Government.
Valuations and View:
Tata Steel’s India operations are one of the most profitable in the industry on the back of value-added mix, pricing power and lower raw material costs. The company sources 100% of its iron ore requirements from captive mines which has led to industry leading EBITDA/t for the company. The company with significant operating and financing leverage will benefit post COVID-19 crisis and recovery both in domestic and global demand. Further, given the fact that China is slowly and steadily getting growth back in its economy, the downside in steel prices are limited and the spreads are likely to improve going forward. We believe that the recent rise in steel prices and consequent price hikes by domestic steel makers are sustainable on the back of improvement in domestic demand and strong demand from China. Indian steel makers have been able to latch on opportunities in the exports markets with record exports in the month of July. Going forward, better realization and improved demand is likely to result in higher margins for top steel makers.
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