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About the stock:

Tata Metaliks (TML) is a subsidiary of Tata Steel, which was established in 1990. 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 ductile iron pipe capacity

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

Q1FY23 Results: TML reported a muted performance for the quarter on account of plant shutdowns, muted demand and higher raw material costs.

* TML’s revenue was at | 666 crore, up 11% YoY but down 18% QoQ

* TML’s EBITDA for the quarter was at | 24 crore, down 84% YoY, 58% QoQ. EBITDA margin was at 7.0% compared to 21.7% in Q4FY21 and 9.8% in Q3FY22. During the quarter, pig iron sales volume was at 68000 tonnes, down 24% YoY, 21% QoQ. Pig iron business adversely got impacted due to muted demand from mid-May 2022 onwards. Pig iron division also got impacted by annual maintenance shutdowns and operational issue in one of the blast furnace for much of April 2022 and May 2022

* Ensuing PAT for the quarter was at | 1 crore, down 99% YoY, 98% QoQ

What should investors do?

TML’s share price has given a return of ~38% over the last two years (from ~| 506 in July 2020 to ~| 700 levels in July 2022).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value TML at | 690 i.e. 5x FY24E EV/EBITDA

Key triggers for future price performance:

* The first phase of ductile iron pipes expansion of ~1 lakh tonnes is likely to commence commercial production in H2FY23 while the second phase of ductile iron pipes expansion of ~1 lakh tonnes is likely to be commissioned in FY24

* One of the key beneficiaries of Jal Jeevan mission

Alternate Stock Idea: In our metal sector coverage we like Jindal Stainless (JSL).

* JSL operates an integrated stainless steel plant at Jajpur, Odisha. The complex has a total stainless steel capacity of 1.1 million tonnes per annum

* BUY with a target price of | 125

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