IGI Logo

India pricing to drive earnings; no relief for TSE

Tata Steel (TATA) reported a strong cons. operating performance led by India. Tata Steel India (TSI) EBITDA grew 36% YoY driven by robust 10.5% volume growth and sharp rise in steel prices, which led realizations increasing by ~INR3,200/t QoQ. Despite higher coking coal costs during the quarter, TSI delivered EBITDA/t of INR15,303/t (PLe: INR14,610/t). TSE also returned to EBITDA positivity at USD2/t supported by healthy demand at Tata Steel Netherlands (TSN) and improved realizations at Tata Steel UK (TSUK). Implementation of revised safeguard measures in the UK from July 2026 onwards, is expected to support pricing and aid TSUK in achieving EBITDA breakeven during FY27. Additionally, mgmt. expects EU steel prices to gradually move closer to the US levels, supported by lower imports and improving regional demand. Higher volumes, ongoing cost optimization initiatives, safeguard measures and the phased implementation of CBAM are expected to support a broader recovery in profitability across TSE during FY27. TSN continues to face elevated environmental regulatory scrutiny at its IJmuiden facility, primarily related to emissions from legacy coke and gas plants. The company incurred over EUR20mn in penalties during FY26, while Dutch regulators are evaluating stricter actions including potential permit revocations and accelerated closure timelines. TSN is currently engaged with authorities to arrive at a feasible transition roadmap and is also exploring legal remedies. TSN faces rising compliance challenges due to increasingly stringent Dutch steel slag disposal regulations that are tighter than prevailing EU norms. Although higher pricing will aid TSE earnings over FY26-28E, TSN’s regulatory uncertainty and delay in power supplies at TSUK may continue to haunt TSE.

Going forward, TSI is expected to deliver superior EBITDA/t in FY27 on higher domestic pricing which is expected to sustain at higher levels aided by China; while there would be volume constraint from FY28 onwards till NINL gets commissioned. Key things to watch out for: a) coking coal movement, b) European demand destruction amid ongoing war, c) faster execution on NINL to maintain market share, and d) TSN’s CGP resolution. We raise our EBITDA estimates by 19%/9% on higher steel pricing assumption and expect EBITDA CAGR of 22% over FY26-28E on the back of strong domestic pricing. At CMP, the stock is trading at 6.8x/6.4x EV of FY27/28E EBITDA. We maintain ‘Accumulate’ rating with revised TP of INR 247 (INR 216 earlier) valuing at 7.5x EV/TSI EBITDA and reduced 5x TSE EBITDA.

Demand and pricing fuels performance: TSI sales volume increased 11% YoY to 6.19mt (2.5% QoQ) on strong demand and falling imports. Average realization improved by 5% QoQ to INR 62,113/t (+1.1% YoY; PLe INR 61,791/t) primarily driven by uplift in steel realizations by ~ INR 3,100/t QoQ. Revenue increased 12% YoY to INR 384bn (+8% QoQ; PLe INR 382bn). Export volumes grew 115% YoY to 0.71mt on low base and TSE substrate supplies (~11.5% of volumes). Standalone EBITDA grew 36% YoY to Rs94.7bn (PLe Rs 90.4bn). RM cost/t at Rs23,527/t moved higher primarily driven by increase in coking coal consumption cost, other expenses/t decreased 2.3% YoY and 1.1% QoQ to Rs20,212 on decline in royalty related expenses. Staff costs decreased 13% YoY to Rs3,071/t. Resultant, EBITDA/t increased 23% YoY to Rs15,303/t (PLe Rs14,610). In domestic, retail and engineering goods segment de-grew 3% YoY while infra declined 14% YoY. Autos grew 16% YoY to 1.39mt.

UK losses narrow; Netherlands volumes rebound:

Tata Steel UK (TSUK) revenue was marginally higher driven by improved realizations while volumes remained broadly flat. EBITDA loss declined QoQ to GBP92/t (-120 in Q3). Volumes remained flat QoQ to 0.52mt while NSR was up 4% QoQ to GBP900/t. Other expenses declined 4% QoQ, change in inventories was down 80% QoQ driven by Inventory drawdown. Tata Steel Netherlands (TSN)sales volumes grew 21% QoQ to 1.7mt while NSR was down 4% QoQ to GBP811/t. TSN EBITDA/t declined to GBP 30/t from GBP34/t QoQ. TSN too saw some drawdown of inventory in Q4, post buildup in Q3.

Please refer disclaimer at https://www.plindia.com/disclaimer/

SEBI Registration No. INH000000271