Accumulate Tata Steel Ltd For Target Rs.212 by Prabhudas Liladhar Capital Ltd
India anchors earnings; TSN gets a breather
Tata Steel (TATA) reported an in-line Q1FY27 with continued robust India operating performance aided by higher steel pricing. Volumes grew 9% YoY due to planned maintenance shutdowns at Meramandali and KPO, while a sharp recovery in domestic steel prices drove NSR higher offsetting the impact of higher coking coal costs. As a result, TSI delivered EBITDA/t of INR17.8k. Europe remained a mixed bag-Tata Steel UK (TSUK) continued to improve with losses narrowing on better pricing and restructuring benefits, while Tata Steel Netherlands (TSN) remained weak due to the temporary shutdown of the 1.4mtpa Direct Sheet Plant (DSP), higher raw material costs and wage revisions. Going forward, the temporary restart of DSP from 5th Aug’26 provides some relief for TSN, with mgmt. expecting the emission issue to be largely addressed. However, this consent to operate remains subject to regulatory assessment after the trial period. TSUK remains on track to achieve EBITDA breakeven in H2FY27, supported by improving steel spreads. In India, NSR is expected to moderate in Q2 by INR1,500/t while coking coal costs are likely to move higher ($5/t) before easing in H2FY27.
Although the near-term overhang from TSN appears to be easing, the pace of capacity addition in the fast-growing Indian steel market remains the key long-term monitorable. Management is focusing on high margin downstream capacities in the near term while upstream addition across KPO, Miramandali, Maharashtra and EAFs remain in planning stage. With the NINL expansion expected to be completed over the next four years, mgmt. reiterated its preference for value-led growth over volume growth, with the near-term focus on richer product mix.
Key monitorables include:
(a) permanent resolution of TSN's regulatory issues
(b) execution of the NINL expansion
(c) steel spreads across regions
(d) progress on the Port Talbot EAF and full electrification. We tweak our EBITDA estimates by 2% each for FY27/28E and expect EBITDA CAGR of 17% over FY26-28E on the back of superior domestic performance. At CMP, the stock is trading at 6.8x/6.6x EV of FY27/28E EBITDA. We maintain ‘Accumulate’ rating with revised TP of INR 212 (INR 226 earlier) valuing at 7.5x EV/TSI EBITDA and 5x TSE EBITDA
Strong pricing cushions volume impact:
TSI sales volume increased just 9% YoY to 5.17mt (-16.5% QoQ) as production and deliveries were affected by maintenance shutdowns in Meramandali and Kalinganagar. Average realization improved sharp 15% QoQ at INR71,367/t (+9.3% YoY; PLe INR67,703/t) primarily driven by uplift in steel realizations by ~INR6k/t QoQ. TSI revenue increased 19% YoY to INR369bn (-4% QoQ; PLe INR350.5bn). Export volumes declined 57% QoQ to 0.3mt (~5.8% of volumes). In domestic, retail & engineering goods segment grew 29% and 14% YoY respectively, while infra remained flat YoY, autos grew 18% YoY to1.3mt. NINL EBITDA stood at ~INR5bn with strong 29% margins. Standalone EBITDA grew 29% YoY to INR91.83bn (PLe INR92.44bn). RM cost/t at INR24,873/t was higher due to rise in coking coal consumption cost, other expenses/t increased 8% YoY to INR24,814 on higher power & fuel, staff costs decreased 7% YoY to INR3,917/t. Working capital was impacted by inventory build-up of 371kt in Q1 due to operational and supply chain disruptions, and an increase in prices. Resultant, EBITDA/t increased 18.5% YoY to INR17,762/t (PLe INR17,856).
TSN drag offsets UK improvement:
TSUK EBITDA loss reduced QoQ to GBP56/t (-92 in Q4) despite volumes declining 8% QoQ to 0.48mt; aided by higher NSR which were up 11% QoQ to GBP1,001/t. Other expenses increased 4% QoQ. Narrowing losses at TSUK is the impact of targeted improvement initiatives and better pricing supported by trade measures. Performance improved despite the pickle line fire at Port Talbot. TSN sales volumes declined 18% QoQ to 1.4mt while NSR was up 9% QoQ to GBP887/t. TSN EBITDA/t declined to GBP2/t from GBP30/t QoQ on higher RM costs mainly coking coal costs, and increased employee costs due to wage revision. TSN performance was impacted also by the temporary shutdown of Direct sheet plant. TSN is progressing towards its restart and is in discussion with the local regulator.
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