Buy Tata Steel Ltd For Target Rs.220 by Motilal Oswal Financial Services Ltd
In-line operational performance; India operations to drive earnings as Europe headwind persists Standalone operating performance in line with estimate
* Tata Steel’s (TATA) standalone revenue came in line at INR425b (+23% YoY and +15% QoQ) in 2QFY27, driven by higher volumes in India, despite seasonally muted quarter.
* Steel production stood at 5.9mt (+9% YoY and +8% QoQ), whereas deliveries came in at ~6mt, up 8% YoY and 16% QoQ, led by broad-based demand across segments, outpacing production growth.
* ASP stood at INR71,129/t, up +14% YoY and flat QoQ, driven by strong steel price recovery during Aug-Sep’26.
* EBITDA stood at INR100b (+23% YoY and +9% QoQ), in line with our estimate. EBITDA/t stood at INR16,742/t (in line) vs. INR17,762/t in 1QFY27. The QoQ decline was primarily due to higher production and input costs, including logistics.
* APAT stood at INR51b (+15% YoY and +6% QoQ), in line our estimate.
Europe’s EBITDA improved in 2Q
* Combined Europe steel deliveries stood at 1.68mt (-20% YoY and -11% QoQ), in line with expectations.
* UK deliveries declined to ~0.4mt in 2Q, despite a QoQ NSR improvement of ~GBP72/t. High imports and inventory accumulation over transitional safeguard arrangements have constrained volumes.
* Combined revenue stood at INR206b (-5% YoY and -6% QoQ) during the quarter, primarily supported by strong NSR, offset by muted volumes.
* Reported EBITDA profit was INR710m (in line with est.) vs. EBITDA loss of INR3b in 1QFY27. EBITDA/t stood at USD4/t vs. EBITDA/t loss of USD17/t in 1QFY27.
* Restart of the DSP improved product mix, integrated plant efficiency and conversion costs. Netherlands EBITDA increased to EUR72m in 2Q from EUR4m in 1Q, translating into EBITDA of ~EUR56/t.
Key highlights from the management commentary
* Management expects 2HFY27 performance to be stronger than 1HFY27, supported by higher volumes, improved steel realizations and seasonally stronger demand post monsoon/festive period.
* India realizations are expected to improve by INR3,500-3,600/t QoQ in 3Q, while volumes should also increase in 2H.
* UK 3QFY27 realizations are expected to increase by GBP28-30/t QoQ. In the Netherlands, product-level realizations may improve by EUR30/t, although blended NSR may decline by EUR11/t QoQ due to adverse product mix.
* The benefits from annual contract renegotiations in Europe are expected to flow through from 1QFY28.
* Tata Steel India iron ore sales target is 8-10mt for FY27 with potential volume of 14-15mt for FY28.
* Coking coal consumption costs are expected to increase by ~USD15/t QoQ in 3Q in both India and the Netherlands. The Netherlands business is expected to benefit from a ~USD5/t reduction in iron ore consumption costs.
* The Netherlands is expected to deliver better performance in 2HFY27 vs. 1H, supported by the restart of the direct sheet plant (DSP), improved plant stability and higher realizations. Full-year production is targeted at ~6.5mt and deliveries at ~6mt, implying average quarterly volumes of ~1.7mt in 2H.
* UK is expected to approach breakeven in 4QFY27, with quarterly deliveries estimated to recover to 500-600kt from the current ~400kt. High imports and inventory accumulation remain the key near-term challenges. Most of the excess inventory is expected to clear by Mar’27, although certain product categories may take until Jun’27.
Valuation and view: Long-term outlook remains strong
* Overall, TATA posted a strong operational performance in 2QFY27 as anticipated, primarily driven by strong volume growth, with elevated NSR at the India/overseas business offsetting the negative impact of inflating costs. Combined Europe EBITDA continues to hover near its breakeven due to operational challenges and muted demand.
* EBITDA improvement is expected for Europe’s operations in the coming quarters on account of improving prices, along with regulatory measure (CABM/reduction in import quotas) and improving operational efficiency.
* Though there are near-term uncertainties related to price volatility and emission challenges in Europe, the long-term outlook should improve.
* At CMP, TATA is trading at 6.5x EV/EBITDA and 1.8x P/BV on FY28E. We reiterate our BUY rating with an SOTP-based TP of INR220 per share on FY28 earnings estimates.
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