Buy Tata Steel Ltd for the Target Rs.230 by Emkay Global Financial Services Ltd
TATA reported strong Q4 results, with consolidated adj EBITDA at Rs99.5bn (+20% QoQ), beating both Emkay and consensus estimates by 5.1%, driven by higher realizations and 6.2% QoQ volume growth. India EBITDA/t improved to Rs15,885, while Europe turned marginally EBITDA positive, aided by stronger realizations in the Netherlands and cost optimization initiatives. We expect Q1FY27 performance to remain robust, supported by margin expansion across geographies. We expect the UK business EBITDA loss to gradually narrow on continued pricing resilience in Europe amid CBAM and safeguard measures. Factoring in sustained spread improvement and cost optimization initiatives, we expect Netherlands EBITDA/t to improve to EUR75 by FY28. With only a 1- 2% revision to our FY27-28E EBITDA, we maintain BUY and TP of Rs230.
Pricing resilience drives Q4 EBITDA beat
Consolidated adj EBITDA of Rs99.5bn was ahead of estimates (+5.1% vs both Emkay and consensus) and increased ~20% QoQ due to higher realizations (~Rs3,100/t) and a 6.2% QoQ increase in sales volume, partly offset by higher coking coal costs during the quarter. EBITDA/t increased 13% QoQ to Rs11,406. India EBITDA stood at Rs98.4bn (up 18.7% QoQ), with EBITDA/t improving 18.7% to Rs15,885, amid strong pricing. Europe reported marginal EBITDA gain of Rs330mn (vs loss of Rs1.7bn in Q3) on strong Netherlands realizations, further supported by cost take-out efforts. Net debt stood at Rs801.4bn, improving 2% QoQ. TATA announced a dividend of Rs4/sh for FY26.
UK breakeven in sight; India volume growth to moderate
In Europe, we expect operating conditions to improve amid recent steel price hikes in the UK and European markets following safeguard measures, including a 60% reduction in tariff-free quotas and higher import duties, which should support a more balanced market environment. This is expected to gradually reduce EBITDA losses in the UK, with the business potentially reaching EBITDA breakeven by 2HFY27, assuming current pricing levels sustain. On balance, we factor in a 12-month delay in the commissioning of the 3mt UK EAF project due to delays in securing power connectivity. In India, the full benefit of the Kalinganagar ramp-up is expected to flow through from FY27, supporting incremental sales volume growth of 1.5mt over FY26, along with an additional 0.5mt contribution from the newly commissioned Ludhiana EAF plant
Strong Q1 outlook backed by improving cross-regional spreads
We expect Q1 performance to remain strong, supported by margin expansion across geographies, backed by continued pricing resilience in Europe aided by CBAM and safeguard measures. Further, we expect Netherlands EBITDA/t to improve to EUR75 by FY28 from EUR34 in Q4FY26, while India EBITDA/t is expected to remain elevated at Rs16,000, driven by cost optimization initiatives and auto contract resets. Our EBITDA estimates remain broadly unchanged with only a 1-2% revision over FY27-28. We maintain BUY with an unchanged target price of Rs230.
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