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Strong domestic outlook; Europe’s breakeven to drive consolidated earnings

Capacity expansion to drive earnings amid demand upswing

* Tata Steel (TATA) is aggressively expanding its capacity in India to capitalize on rising domestic demand, targeting an increase from 26.5mtpa in FY25 to 40mtpa by FY30.

* The company has commissioned a 5mtpa integrated capacity at Kalinganagar, increasing the plant’s total capacity to 8mtpa (INR270b investment), with phase-III expansion targeting 13mtpa. Other key projects include scaling NINL from 1mtpa to 4.5mtpa, a 0.75mtpa electric arc furnace (EAF) at Ludhiana by FY27, and expanding Meramandali from 5.6mtpa to 8.2mtpa.

* In Europe, TATA is transitioning to green steelmaking, converting Port Talbot (UK) to a 3mtpa EAF and exploring a gas-based DRI + EAF route at IJmuiden (Netherlands), subject to policy clarity.

India’s steel demand and safeguard duty to support domestic prices

* India's steel demand is projected to grow ~8-10% over FY26-27, backed by a robust demand environment, policy support, and ongoing recovery in industry fundamentals.

* To protect against rising imports, the Indian government has proposed a 12% safeguard duty on flat steel products, which could support domestic prices.

* Currently, market sentiment for 2HFY26 points to a gradual price recovery, muted costs (especially coking coal prices), and demand tailwinds.

Breakeven for European operations – TSUK breakeven on track; TSN cost restructuring to drive profitability

* TATA’s European operations are moving toward breakeven amid restructuring and cost optimization. EBITDA losses have narrowed from USD76/t in 2QFY25 to USD8/t EBITDA gain in 1QFY26, aided by lower energy costs and improved efficiency.

* With the UK BF shutdown and the Netherlands ramp-up, Europe’s EBITDA is expected to improve further. We expect it to rise from USD8/t in 1QFY26 to USD70/t by FY28, which should also support consolidated EBITDA/t increasing to INR13,000/t by FY28E (vs. INR8,376/t in FY25).

Valuation and view: Upgrade to BUY

* TATA is one of the largest players in India's steel sector and is set to benefit from improving steel price realizations, operating efficiencies, and the strong domestic demand outlook. The implementation of the safeguard duty is expected to help domestic operations achieve better realization.

* While near-term challenges persist due to global uncertainty around tariff escalations, the long-term outlook for TATA remains strong. The Indian business is expected to continue its strong performance, and an improvement in the European business performance is likely to support overall earnings.

* TATA is expected to generate a strong OCF of INR957b, which will help fund the ongoing/planned expansion of INR160b annually without leveraging the balance sheet. Net debt stood at INR848b as of 1QFY26, which includes cash of INR141b. This translates into net debt/EBITDA of 3.21x as of Jun’25.

* At CMP, TATA is trading at 6.8x EV/EBITDA and 1.9x FY27E P/B. We upgrade the stock from Neutral to BUY with an SOTP-based TP of INR210 per share on Sep’27 estimate

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