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On strong footing…

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 five steel companies in the DJSI Corporate Sustainability Assessment

Key Updates:

* Over the last few days, Indian steel prices have witnessed a softening trend. Domestic HRC prices have declined from | 67500/tonne as on November 30, 2021 to | 65500/tonne on December 09, 2021. Along with steel prices, prices of key inputs such as coking coal have also witnessed a    falling trend. During November 2021, coking coal prices (CNF India, Australia premium hard coking coal) were at ~US$318/tonne compared to ~US$403/tonne in October 2021, registering a decline of 21% MoM

* China recently cut its reserve requirement ratio by 50 bps to boost its economic growth. This cut in reserve requirement ratio for major commercial banks will be effective from December 15, 2021. This step to cut the ratio augurs well for Chinese steel demand, in general

* Chinese finished steel exports declined for a fifth consecutive month in November 2021, falling 3.1% MoM to 4.4 MT (a new monthly low for CY21). Monthly Chinese steel exports have declined from 6.5 million tonnes (MT) in June 2021 to 4.4 MT in November 2021

* Over the last six months, Tata Steel’s net debt/equity has improved from 0.98x at the end of FY21 to 0.79x at the end of H1FY22. Similarly, Tata Steel’s net debt/EBITDA has improved from 2.44x at the end of FY21 to 1.21x at the end of H1FY22

What should investors do? TSL’s share price has given a return of 93% over the last 12 months (from ~| 610 in December 2020 to ~| 1178 levels in December 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value TSL at | 1400, based on SoTP valuation

Key triggers for future price performance:

* India’s share in Tata Steel’s overall consolidated production capacity has risen from 29% in 2010 to 57% in 2020 and is likely to reach 73% by 2030

* For FY22E, Tata Steel is targeting over US$2 billion gross debt reduction wherein it will prioritise offshore debt repayment

Alternate Stock Idea: In our metal sector coverage, we also like Hindalco.

* Hindalco is the world’s largest aluminium company by revenue and a major player in copper segment

* BUY with a target price of | 600

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