Hold Tata Steel; target of Rs 425: ICICI Direct

Tata Steel UK has reached an agreement with trade unions on a number of proposals that would structurally reduce risks and help secure a more sustainable future for its UK business. The proposal will need employees’ approval. As per the agreement, the company, in the near term, will start consultation with its employees on a proposal to close the British Steel Pension Scheme (BSPS) to future accrual. Employees would be offered a competitive defined contribution scheme. The company and trade unions have also agreed on the principle that subject to structural de-risking and de-linking of BSPS from the business, Tata Steel UK will continue the existing blast furnace configuration in Port Talbot until 2021. Further, based on achieving the necessary financial performance and cash flows as per the transformation plan of the UK business, the company will continue to invest across UK sites to enhance the competitive position of Tata Steel UK in European steel industry.

ValuationAs part of the agreement, all parties are cohesively working towards making Tata Steel UK a sustainable business in the longer term horizon. The proposal on pensions & other changes in employment terms are part of the ongoing transformation plan the business is undertaking. On domestic business front, we marginally tweak our FY17E, FY18E numbers. We value domestic operations at 6.5x FY18E EV/EBITDA and overseas operations at 5x FY18E EV/EBITDA. We value the stock on SOPT basis and arrive at a target price of Rs 425 with HOLD rating on the stock.