Prabhudas Lilladher's research report on Tata Steel
TATA steel (TATA) reported strong set of Q1FY23 earnings. EBITDA remained flat QoQ at Rs149.7bn (down 7% YoY), above our/consensus estimates (CE) by 16%/20%. The beat was largely due to stronger than expected margins in Tata steel Europe (TSE). Domestic steel prices fell sharply by ~25% in last couple of months due to slump in global demand, elevated inventory and subdued recovery in Chinese demand. We see further fall in prices in wake of sharp decline in coking coal prices, destocking and weak demand. Though margins are expected to come off sharply by 35-40% QoQ in Q2FY23, still the levels are far higher than sustained low margins in down cycle. We expect that it would take couple of quarters for margins to bottom-out due to 1) weak demand in US & Europe, 2) concerns on high inflation and 3) uncertain market conditions in China. Stock has come-off sharply, because of combination of factors including export duty imposed by Govt of India.
However, margins way above historical averages in both India and Europe, challenging macro environment and limited upside drives our negative view on stock. Maintain Reduce rating with TP of Rs975, EV/EBITDA of 5x FY24e.
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