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Softening coking coal prices augur well…

About the stock: Tata Steel group is among the top global steel companies with an annual steel production capacity of ~34 million tonnes per annum (MTPA).

* Tata Steel (TSL) is one of the world’s most geographically diversified steel producers, with operations and commercial presence across the world

* Since 2016, TSL has been consistently ranked among the top 10 steel companies in the DJSI Corporate Sustainability Assessment

Key Highlights:

* Over the last one month (i.e. from July first week to August first week) domestic hot rolled coil (HRC) prices have been range bound and hovered at ~| 57500-59500/tonne. In the backdrop of range bound domestic steel prices (HRC), the recent sharp fall in coking coal prices augurs well for Indian steel players. Over the last couple of months coking coal prices have halved from ~US$415/tonne in June 2022 to ~US$208/tonne currently in August 2022. The benefit of lower coking coal costs is likely to feed through in the cost base by September 2022 for Tata Steel Indian operations and by Q3FY22 for Tata Steel European operations

* During Q1FY23, Tata Steel Indian operations reported sales volume of 4.06 million tonnes. For Q2FY23E, sequentially Tata Steel Indian operations sales volumes is likely to be 0.5 million tonnes (MT) higher compared to Q1FY23

* During Q1FY23, Tata Steel’s European operations achieved highest ever quarterly EBITDA of | 6037 crore (up 294% YoY and 39% QoQ). European operations reported a strong beat on the EBITDA front aided by long term contracts and product mix. For Q1FY23, Tata Steel European operations reported EBITDA/tonne of US$365/tonne (US$89/tonne in Q1FY22 and US$241/tonne in Q4FY22)

* Tata Steel Long Products, a subsidiary of Tata Steel, completed the acquisition of Neelachal Ispat Nigam (NINL) on July 4, 2022
 

What should investors do? TSL’s share price has given a return of ~159% over the last two years (from ~| 42 in August 2020 to ~| 109 levels in August 2022).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Tata Steel at | 130, based on SoTP valuation

Key triggers for future price performance:

* With respect to NINL, Tata Steel plans to restart NINL’s blast furnace in next three months & ramp up capacity to ~80-100 KT/month run-rate by Mar’23

* Tata Steel remains committed to its annual deleveraging target of US$1 billion in line with its capital allocation strategy to reduce debt

Alternate Stock Idea: In our metal sector coverage, we also like Jindal Stainless

* Jindal Stainless (JSL) has a 1.1 million tonnes per annum (MTPA) integrated facility with backward integration.

* BUY with a target price of | 135

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