Accumulate Tata Steel Ltd For Target Rs.215 by Prabhudas Liladhar Capital Ltd
Strong India, recovering TSN; UK struggles
Tata Steel (TATA) reported a strong Q2FY27, with consolidated EBITDA growing 18% YoY to INR105.3bn, led by robust India (TSI) performance and a sharp recovery in the Netherlands (TSN) following the restart of its Direct Sheet Plant (DSP) in August. TSI volumes grew 8% YoY to 5.98mt on drawdown of inventory in seasonally weak monsoon quarter, while benefit of Auto contracts negated longs weakness driving EBITDA to INR100bn (up 23% YoY). Europe remained mixed: TSN saw EBITDA improve to EUR72mn from EUR4mn in Q1FY27 as the DSP restarted, while TSUK continued to report losses of GBP147/t on low volumes absorbing entire costs amid weak market impacted by imports. Going forward, India is expected to lead the H2 recovery, supported by higher volumes and improved steel realizations. In Europe, TSUK is targeting near breakeven by Q4FY27 as excess inventory gradually normalizes, while sustaining the DSP ramp-up remains key to TSN's recovery.
Mgmt. reiterated its preference for value-led growth, with near-term capex focused on downstream capacities and a richer product mix, while major upstream additions planned remain on track. A 4.8mtpa NINL expansion with total capex of ~INR339bn has entered the execution phase and remains on track for FY30E commissioning. In Europe, the focus remains on resolving TSN's regulatory uncertainties and progressing its longterm transition to a DRI-EAF route, with the JLOI extended to Mar'27.
Key monitorables include:
(a) sustainability of the domestic steel spreads
(b) timely execution of capex at NINL/ Meramandali debottlenecking
(c) rising debt levels
(d) resolution of TSN's regulatory and decarbonization-related uncertainties
(e) progress on the Port Talbot EAF project for early breakeven. We increase our EBITDA estimates by 3% each for FY28/29E on lowering CC prices and expect EBITDA CAGR of 13% over FY26-29E on the back of superior TSI performance and Europe recovery. At CMP, the stock is trading at 6.3x/5.8x EV of FY28/29E EBITDA. We maintain ‘Accumulate’ rating with revised TP of INR 215 (INR 209 earlier) valuing at 7.5x EV/TSI EBITDA and 5x TSE EBITDA.
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SEBI Registration number is INH000000933
