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Performance likely to improve, going forward….

About the stock: Tata Metaliks (TML) is a subsidiary of Tata Steel, which started its commercial production in 1994. TML has manufacturing facilities in Kharagpur, West Bengal, which produces pig iron and ductile iron (DI) pipes

* TML is currently in the process of expanding its DI pipe capacity

* TML has a healthy balance-sheet. It is one of the few players in the steel pipe sector having net cash position on its balance sheet

Q3FY23 Results: Tata Metalik’s (TML’s) Q3FY23 performance was adversely impacted by operational issues with one of the blast furnaces, which had frequent shutdowns thereby increasing the operating costs. The blast furnace was repaired in early December 2022 and is now operating well.

* TML’s revenue was at | 790 crore, up 15% YoY but down 10% QoQ. TML’s pig iron sales volumes were at ~63000 tonnes, down 25% YoY. TML’s ductile iron (DI) pipes sales volume was at ~77000 tonnes, up 16% YoY & 11% QoQ. The growth in DI pipe volume was aided by the new plant. DI pipe plant – 2 (new plant) had a vertical ramp-up wherein production of finished DI pipes touched 25 KT in Q3FY23 compared to 13 KT in Q2FY23

*TML’s EBITDA for the quarter was at | 39 crore, down 43% YoY and 5% QoQ. TML’s EBITDA margin for the quarter was at 4.9% compared to 4.7% in Q2FY23 and 9.8% in Q2FY23

* Ensuing PAT for Q3FY23 was at | 9 crore, down 74% YoY and 34% QoQ

What should investors do? TML’s share price has given a return of ~37% over the last three years (from ~| 625 in January 2020 to ~| 856 levels in January 2023).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value TML at | 900 i.e. 6.5x FY24E EV/EBITDA

Key triggers for future price performance:

* Domestic demand of pig iron is expected to firm up in Q4FY23 as utilisation levels in general castings, agriculture, etc are likely to improve

* Demand outlook for DI pipes for Q4FY23 is robust in line with government’s increased outlay through Jal Jeevan mission to provide drinking water

Alternate Stock Idea: In our metal and mining coverage we like Midhani.

* Mishra Dhatu Nigam (Midhani) is a leading manufacturer of special steel, super alloys and titanium alloys catering to niche end-user segments like space, defence, etc.

* BUY with a target price of | 285

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