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Stretched valuation; cautious outlook Tata Steel is a leader in the global steel industry with operations spanning over 26 countries with key operations in India, Netherlands and United Kingdom. Tata steel primarily caters to customers in automotive, construction, engineering, energy and power sectors.

• Tata Steel reported a revenue decline of 3.1% YoY to Rs.55,312cr in Q3FY24, due to lower revenue from international operations.

• In Q3FY24, EBITDA grew 54.7% YoY to Rs.6,264cr. EBITDA margin expanded 420 bps YoY to 11.3%, aided by lower input costs. PAT stood at Rs.513cr in Q3FY24, as against a net loss of Rs.2,224cr in Q3FY23.

• Domestic growth was offset by subdued global performance. Strong domestic demand, improving spot prices in Europe, commissioning of the Kalinganagar blast furnace, coupled with the conversion of its UK business blast furnaces to electric arc furnaces are key growth factors in the medium-to-long term. However, valuation appears expensive at current levels and the stock is adequately priced in. Hence, we downgrade our rating on the stock to HOLD, with a rolled-forward target price of Rs. 151, based on sum-of-the-parts (SOTP) valuation.

Weak international demand impacts top-line growth In Q3FY24, revenue decreased 3.1% YoY to Rs.55,312cr, due to a 12.5% YoY decrease in revenue from Europe amid subdued demand across consuming sectors. However, revenue from Indian operations grew 2.2% YoY to Rs.34,682cr in Q3FY24. Domestic production volume grew 3.8% YoY and delivery volume grew 3.0% YoY. Domestic steel consumption rose 11% YoY in Q3FY24, driven by government spending.

Higher consumption costs expected to impact margins EBITDA stood at Rs.6,264cr (+54.7% YoY) in Q3FY24. EBITDA margin improved 420bps YoY to 11.3%, supported by lower consumption costs. EBITDA/tonne rose to Rs.8,760/t from 5,661/t in Q3FY23. Management expects domestic net realisation to decline by Rs.1000/tonne and consumption cost of coking coal to increase by $10/tonne in Q4FY24. Conversely, spot prices in Europe increased, and net realisation in the UK is expected to rise by GBP40/tonne (USD 51/tonne) in Q4FY24, while the Netherlands is expected to see a decline of GBP14/tonne (~USD18/tonne), as previous contracts were fixed at lower rates. Coking coal consumption costs in the Netherlands and the UK are expected to increase by $18/tone and $11/tonne, respectively.

Key concall highlights

• Blast furnace 6(BF6) lining in the Netherlands is expected to start operations shortly which is expected to improve volume.

• In the UK, two BFs and coke ovens are expected to be shut down in phases in FY24, to potentially reduce fixed costs.

• Management expects demand from railways, transportation and infrastructure sectors to drive growth in steel in the coming quarters.

Valuation Growth in domestic operations was offset by weak demand for international operations. Factors such as robust domestic demand, rising spot prices in Europe, asset restructuring, and new operations in Europe are expected to support growth in the long term. However, we remain cautious due to the recent uptick in raw material costs, which could limit margin expansion in the near term. Further, the stock’s valuation looks expensive at the current levels. Hence, we downgrade our rating to HOLD, with a rolled-forward target price of Rs. 151 based on SOTP valuation.

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