Buy Tata Steel Ltd for the Target Rs 230 by Emkay Global Financial Services Ltd
TATA reported an in-line 1Q, with resilient India operations offsetting weaker Europe performance. India EBITDA/t improved by Rs3,280 qoq to Rs19,164/t on stronger realizations, while Europe slipped to an EBITDA loss due to the Netherlands' DSP shutdown. While the management guides for a ~Rs1,500/t qoq decline in India realizations and $5/t increase in coking-coal costs in 2Q, we expect qoq EBITDA improvement, driven by higher volumes, normalization after maintenance shutdowns, and better fixed-cost absorption. While Europe should improve gradually, recurring operational disruptions keep the sustainability of breakeven earnings uncertain. We retain BUY and TP of Rs230
1Q performance was on expected lines
Consolidated adjusted EBITDA of Rs93.7bn was in line with expectations (+1.3% vs Emkay and +3.2% vs consensus; -5.8% qoq), owing to lower volumes, primarily on account of seasonal inventory buildup in India and lower Netherlands volumes. India Business: Adjusted EBITDA at Rs99.1bn was sequentially flat on account of strong pricing tailwinds during the quarter, partly offset by a qoq decrease in deliveries. EBITDA/t stood at Rs19,164 vs Rs15,885 in 4QFY26 (+20.6% qoq). Sequential price improvement aided EBITDA, partly offset by a 16.6% qoq decrease in volumes, along with elevated input costs arising from the West Asia conflict. European operations disappointed in 1QFY27, with EBITDA slipping to a loss of Rs3.0bn (vs Rs0.3bn profit in 4QFY26), largely reflecting weak profitability in the Netherlands, following the DSP shutdown. Higher realizations provided only a partial offset, with Netherlands EBITDA falling 93.8% qoq to Rs0.4bn. Net debt increased to Rs842bn (+5.0% qoq and flat yoy).
India outlook remains robust in 2Q
India HRC prices remain firm at a QTD average of ~Rs58,000/t, while rebar prices have declined ~14.3% QTD vs 1Q averages due to seasonal weakness during the monsoon. Accordingly, TATA has guided for a modest ~Rs1,500/t qoq decline in India realizations. Additionally, a $5/t qoq increase in coking-coal consumption costs is likely to exert further pressure on spreads. Nevertheless, we expect India EBITDA to improve sequentially, as production normalizes following the completion of annual maintenance shutdowns and resolution of operational disruptions. Higher volumes should drive better fixed-cost absorption, largely offsetting the impact of lower realizations and elevated raw material costs. In Europe, the management expects realizations to improve sequentially; however, the translation into EBITDA is likely to be gradual, as higher substrate costs and contractual pricing mechanisms will temper the flow-through to margins
European profitability remains elusive; maintain BUY
We view the results as broadly positive, with TATA's India business delivering a healthy Rs3,280/t qoq improvement in EBITDA spreads. However, the widening losses in Europe reinforce our long-held view that the sustainability of its breakeven earnings remains uncertain, given the business's repeated operational disappointments. We maintain BUY with an unchanged target price of Rs230.
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