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Higher prices due to increased global and domestic demand for steel products can result into better realization for the company thus leading to high double digit operating margins.

Owing to increased global demand and reduction of exports from China steel prices reached an all time high of CNY 5,938/tonne in May 21 and marginally softened to CNY 5,807/tonne in June 21 from the price of CNY 2,260/tonne in Oct 2016. Domestic Hot Rolled Coil prices also increased from Rs.36,920/tonne to Rs.66,250/tonne.

Increased demand for steel products due to the economic growth of the country by 2030.

India is the fastest growing economy in the world and with China + 1 strategy of various global conglomerates the economic growth is set to boom in the coming years. Economic expansion will and has directly lead to, and not limited to, revival in the auto industry, large scale infrastructure projects and increased demand in the real estate segment which will create increased demand for the steel products in the country directly benefitting steel manufacturing companies.

Expansion to maintain leadership position in the steel industry and cater to the increasing demand.

The company has set its eyes on expansion of its Iron and Steel manufacturing capacities in line with the economic development of the country. The company has an action plan in place to increase its India operations from 19.6 MnTPA to 40 MnTPA till FY 2030 with 5 MnTPA expansion in progress at their Kalinganagar facility where flat products will constitute 30 MnTPA and long products 10 MnTPA. The company intends to scale up its global operations to 55 MnTPA till FY 2030.

OUTLOOK & VALUATION

We assume that for FY22E and FY23E the company may deliver sales growth of 10.3% and 9.2% respectively, expected increase in sales volumes is 5% & 3% in FY22E and FY23E and realization is also expected to increase by 5% & 6% in FY22E and FY23E. In addition to the growth in the revenue, we expect the company to deliver strong EBITDA and PAT margins of ~20% and ~7.8% respectively in FY23E.

Our estimates for EPS for the year FY22E & FY23E is projected to be ~Rs. 97.48 and Rs. 122.91 respectively. Hence, we initiate coverage on Tata Steel Ltd with a ‘BUY’ rating. We have assigned an EV/EBITDA multiple of ~7.2X and arrived at a target price of Rs.1,658 that provides an upside of ~28% from the current market price of Rs. 1,295 within an investment horizon of 18 to 24 months.

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