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Favorable steel pricing supports near-term earnings; Europe remains monitorable

Despite being a seasonally soft quarter, domestic steel prices across the board have surged sharply, driven by maintenance shutdown-led lean channel inventory, improved consumption (during Jul-Aug’26 as compared to Apr-May’26), and input cost inflation. Considering this, we expect Tata Steel’s (TATA) Indian business to deliver strong earnings in 2Q. Going forward, industry pricing discipline will remain vital for margin sustenance, as the impact of the current cost inflation is likely to become evident with a lag in 2HFY27. We remain constructive on TATA, given the ongoing capacity expansions, favorable steel pricing, and resilient demand, which should position the company to capitalize on the long-term domestic opportunity. TATA Europe’s earnings remain contingent on regulatory decisions and spread movement, given the volatility in pricing and energy costs. A gradual stabilization and turnaround in Europe can lead to a potential earnings and re-rating opportunity. At CMP, TATA is trading at 6.8x FY28E EV/EBITDA and 1.8x FY28E P/B. We reiterate our BUY rating with an SoTP-based TP of INR220 on FY28 estimate.

Favorable pricing to more than offset recent cost increase; margin sustainability hinges on pricing discipline

* Domestic HRC prices have inched up 7% MoM to a four-year high of INR62,000/t in Sep’26, while rebar prices have also recovered sharply to INR56,800/t from INR48,850/t in Jun’26, mainly supported by lean channel inventories, maintenance-led supply constraints, and rising input costs, despite seasonality weakness.

* Input costs (coking coal, iron ore, and pellet) have simultaneously increased, raising the cost base for steelmakers. Premium Australian coking coal price has risen to USD300/t from USD260/t in Jun’26. Iron ore and pellets prices also remained firm during the muted demand cycle.

* During Jul-Aug’26, India produced ~27.5mt and consumed ~28.7mt of finished steel compared to 40.7mt and 41.6mt in 1QFY27, respectively. The faster growth in consumption relative to production has kept the domestic market relatively tight.

Capacity expansion on track; likely to help capitalize on the opportunity

* TATA announced to expand its capacity from 27.4mtpa in FY26 to 40mtpa by FY31, with an annual capex commitment of ~INR160b.

* With Kalinganagar phase-III expansion, TATA targets to reach 13mtpa from 8mtpa (incl. phase-II expansion of 5mpta, stands under ramp-up phase).

* It is scaling NINL’s capacity by 4.8mtpa to 6.2mpta (~10mtpa potential). Board approval has been received and expansion is underway with an expected timeline of 48 months.

* TATA is converting its Port Talbot (UK) BF plant to 3mtpa EAF, while Netherland’s expansion remains under negotiation phase given the policy concerns.

Valuation and view: BUY

* The Indian business is expected to continue its strong performance, driven by improved pricing. In Europe, while near-term profitability remains contingent on spread recovery and energy costs, structural measures such as CBAM and tighter import quotas should improve pricing discipline and reduce margin pressure.

* TATA is one of the largest players in India's steel sector, and we maintain a constructive stance, supported by a strong domestic demand outlook and favorable price support. Net debt stood at INR823b in FY26, which includes cash of INR100b. This translates into a net debt/EBITDA ratio of 2.4x in FY26.

* At CMP, TATA is trading at 6.8x FY28E EV/EBITDA and 1.8x FY28E P/B. We reiterate our BUY rating with a SoTP-based TP of INR220 on FY28 estimate

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