Buy Tata Steel Ltd for the Target Rs.220 by Motilal Oswal Financial Services Ltd
In-line operational performance; outlook bright with strong India operations
* Tata Steel’s (TATA) standalone revenue stood at INR369b (+19% YoY and -4% QoQ) against our estimate of INR348b. The growth was largely driven by strong NSR, offsetting the muted volume during the quarter.
* Crude steel production stood at 5.76mt (+10% YoY and -7% QoQ), whereas deliveries were in line with our est. at 5.2mt, which grew 5% YoY but fell 16% QoQ. The quarterly production and deliveries were affected by maintenance shutdowns in Meramandali and Kalinganagar. ? ASP improved 9% YoY and 15% QoQ to INR71,367/t in 1QFY27, driven by strong steel price recovery during the quarter, led by safeguard duty.
* EBITDA stood at INR91.8b (+29% YoY and -3% QoQ), which came in line with our estimates, translating into EBITDA/t of INR17,762 (+19% YoY and +16% QoQ) as input cost inflation (higher coking coal consumption cost) was fully offset by strong NSR.
* APAT for the quarter stood at INR48b (+29% YoY and flat QoQ), which was in line with our estimate.
Europe EBITDA remained under pressure in 1Q
* Combined Europe revenue stood at INR219b (+6% YoY and -4% QoQ) during 1QFY27, primarily supported by strong NSR, offset by muted volumes.
* Combined Europe steel deliveries stood at 1.88mt (in line with our estimate), down by 10% YoY and 15% QoQ during the quarter.
* The production and deliveries were impacted in the Netherlands due to the shutdown of direct sheet plant in Apr’26. Going forward, the local environment authority has permitted trial runs, ahead of the restart of full operations in the Netherlands.
* EBITDA loss stood at INR3b (in line with est.) during the quarter vs. EBITDA of INR1.4b in 1QFY26 and INR320m in 4QFY26.
* Muted earnings were mainly attributed to the decline in Netherlands EBITDA to INR400m in 1QFY27 from INR6.24b in 4QFY26 and INR6.12b in 1QFY26. UK EBITDA loss narrowed to INR3.4b in 1QFY27 from INR5.9b in 4QFY26.
* This translates into EBITDA/t loss of USD18 in 1QFY27 vs. EBITDA/t of USD8 in 1QFY26 and USD2 in 4QFY26.
Valuation and view: Long-term outlook remains strong
* Overall, TATA posted a decent operational performance in 1QFY27 as anticipated, primarily driven by strong NSR in India/overseas business, offsetting the negative impact of muted volume. Combined Europe EBITDA continues to hover near its breakeven due to operational challenges and muted demand.
* India business is expected to continue its strong momentum, driven by strong prices and muted costs. The strong domestic demand would support volumes ahead.
* EBITDA improvement is expected for Europe operations in the coming quarters owing to improving prices along with regulatory measures (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 remains strong.
* We trim our FY27 EBITDA/PAT estimates by 7%/14%, owing to weak earnings from Netherlands operation pertaining to direct sheet plant shutdown and input cost inflation. We keep FY28E earnings largely unchanged. At CMP, TATA is trading at 7x EV/EBITDA and 1.8x P/BV on FY28E. We reiterate our BUY rating with an SOTP-based TP of INR220 per share on FY28E earnings.
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