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Turning over a new leaf

Tata Steel (TSL) has announced deep restructuring of its UK operations (TSUK) with twin objectives of business continuity and sustainability. Key points: 1) Existing blast furnaces to be replaced by 3mtpa Electric Arc Furnace (EAF); 2) 40% of GBP 1.25bn investment to be funded through the grant by the UK government; 3) cost differential of GBP 150-170/te compared to current operations; 4) possible emission reduction to 0.4tCO2/te from the current level of 2.16 tCO2/te at UK operations; and 5) setting up of EAF may complement the scrap ecosystem in the UK. In our view, the development assumes significance as support from parent for TSUK operations is likely to reduce in future. As a result, we raise our valuation multiple to 6x (earlier 5.5x), resulting in a revised TP of INR 150 (earlier INR 135). Maintain ADD.

Deep restructuring of UK operations

TSL and the UK government have jointly agreed on a proposal to investment in EAF steel making facilities replacing the existing heavy-end facilities (blast furnace and coke ovens) approaching the end of life. Key points: 1) Investment of GBP 1.25bn of which up to GBP 500mn will be through the grant from the UK government; 2) significant decarbonisation potential by reducing direct emissions by 5mtpa; and 3) non-cash impairment of legacy investments and potential elimination of the current cash losses at TSUK would lead to balance sheet restructuring. Management during analyst call indicated that consultation process with various stakeholders is likely to complete within the next 45-60 days and the new EAF may be operational within 36 months of the receipt of relevant regulatory and planning approvals. Besides, the existing sales volume is likely to be unaffected in the interim as downstream facilities would continue to operate uninterrupted through the import of additional steel substrate

See an incremental value of INR 10-16/share

During the analyst call, management mentioned that the loss at EBITDA level at UK operations was GBP 127mn and GBP 39mn for FY23 and Q1FY24, respectively, with support from parent at GBP 163mn. Further, TSK operations incurred carbon cost of GBP 70mn per annum. Management indicated that there is a cost saving potential of GBP 150-170/te compared to the existing operations and IRR potential of 15-16% from the new investment as upstream. facilities are not operating at their optimal state and lower carbon cost. Besides, there could be an additional benefit from the British Industry Supercharger scheme. We peg an incremental value of INR 10-16/share at the steady state based on different scenarios of cost saving potential.

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