Buy Tata Steel; target of Rs 144: Prabhudas Lilladher

Prabhudas Lilladher's research report on Tata Steel

Tata Steel has announced a proposal to setup a 3mtpa Electric Arc Furnace at its Port Talbot steel making facility for capex of GBP 1.25bn. The proposed project will get GBP500mn grant (40% of the project cost) from UK government and adequate policy support for smooth transition to green steel making in UK at competitive landscape. While first stage of the process stands complete with this agreement, consultations with unions involved are expected to close in next three months. Capex is planned over next three years post successful consultation and subject to relevant regulatory approvals. We believe that the Tata Steel UK (TSUK) transition is EPS accretive given a) current cash losses will end, as company will import substrate instead of producing at old facilities, b) one-time cost will exist, but TSUK is expected to be in better situation than earlier case of recurring cash burn, c) volatility in coking coal prices won’t directly affect TSUK earnings, and d) likely fall in energy costs, as UK moves towards renewable sources.

Outlook

We revise our FY25E EBITDA estimates upwards by 5% to Rs411bn and introduce FY26E earnings estimates. Maintain ‘Buy’ at revised TP of Rs 144 (Rs 137 earlier) assigning EV/EBITDA multiple of 5x for FY25E EBITDA for TSE.