Buy Tata Steel Ltd for the Target Rs 210 by Emkay Global Financial Services Ltd
Tata Steel’s 2QFY27 adjusted EBITDA was broadly in line with our estimates, with strong India volumes offsetting higher coking coal costs, while UK losses widened further. We expect India operations to remain resilient in 3QFY27, supported by higher realizations, incremental volumes, and cost efficiencies. European profitability should improve gradually, although UK breakeven remains uncertain amid persistent operational challenges. FY28 earnings growth is likely to accelerate on capacity ramp-up and improved operating leverage. We maintain BUY with an unchanged TP of Rs210.
Volume-led EBITDA growth, with UK operations disappointing
Consolidated adjusted EBITDA of Rs106.7bn was broadly in line with our estimates, while exceeding consensus by 6.6% (up 13.8% qoq), primarily driven by a 15.7% sequential increase in volumes despite seasonally softer demand. The volume-led improvement was partly offset by heightened cost pressures amid the West Asia conflict. India adjusted EBITDA rose 7.3% qoq to Rs106.3bn, supported by strong volumes, which partly offset the impact of higher coking coal costs. EBITDA/t remained healthy at Rs17,783, albeit declining 7.2% qoq from Rs19,164 in 1QFY27. UK operations witnessed a further deterioration, with EBITDA loss widening to Rs7.2bn from Rs3.4bn in 1QFY27, primarily due to weak demand and inventory buildup across the UK supply chain ahead of revised trade measures. In contrast, Netherlands profitability improved, aided by lower purchases following the restart of DSP, resulting in a positive EBITDA contribution from European operations in 2QFY27. Net debt increased 8.6% qoq and 5.0% yoy to Rs914bn.
India strength and European recovery to drive earnings growth
TATA’s India operations to remain robust in 3QFY27, with higher realizations of Rs3,500- 3,600/t and incremental volumes, including higher iron ore sales (~10mt for FY27), likely to largely offset the impact of elevated coking coal prices. The earnings trajectory should be further supported by ongoing cost takeout initiatives, with management targeting Rs70bn of cost savings in FY27. While improving steel prices and contract renegotiations are expected to drive a recovery in European realizations, UK operations continue to face volume-related challenges amid elevated import inventories, constraining the path to breakeven. Nevertheless, UK losses are expected to moderate in 2HFY27, with breakeven targeted by 4QFY27. Looking ahead, FY28 should witness a meaningful step-up in earnings, driven by incremental volumes from capacity expansions, improved operating leverage, and continued enrichment of the value-added product mix. We believe the combination of a resilient India business, European loss moderation, and volume-led growth in FY28 provides a favorable earnings trajectory for Tata Steel.
Europe remains a key overhang; maintain BUY
We view the results as broadly positive, with TATA delivering a healthy ~Rs575/t qoq improvement in EBITDA spreads, supported by improved Netherlands profitability, while peers lagged. However, widening European losses reinforce concerns over sustainable breakeven, given repeated operational setbacks. We maintain BUY and TP of Rs210.
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