Buy Tata Steel; target of Rs 138: Prabhudas Lilladher

Prabhudas Lilladher's research report on Tata Steel

We cut our FY24E/25E/26E EBITDA estimates by 2%/6%/4% on higher coking coal prices and higher losses from TSUK in 1HFY24. Tata Steel’s (TATA) consolidated operating performance was affected by weak Tata Steel Europe (TSE) in 2Q. Tata Steel India (TSI) performance was in-line with EBITDA/t of Rs14,006 while TSE EBITDA loss widened QoQ to USD169/t due to weak demand and lower production from Tata Steel Netherlands (TSN). In 3Q, TSI is expected to deliver stronger EBITDA/t as expected coking coal price hike is just USD10/t for TSI; while weak TSE performance is likely to be negated by lower coking coal prices due to inventory lag effect at TSN (~USD60/t). Key parameters to watch are a) progress on consultation process with unions at Tata Steel UK (TSUK) which is ongoing and b) commissioning of Kalinganagar blast furnace (KPO II) & stabilization which will drive volume growth in FY25/26E.

Outlook

We expect Revenue/EBITDA/PAT CAGR of 5%/9%/28% over FY23-26E. At CMP, stock is trading at 5.3x/4.8x EV of FY25E/FY26E EBITDA. Retain ‘BUY’ rating with revised TP of Rs138 (earlier Rs144) valuing at 6x EV of Sept 2025E TSI EBITDA, as we roll forward.