Sell Tata Steel; target of Rs 340: Centrum

Centrum's research report on Tata Steel

We retain Sell on Tata Steel with a revised TP of Rs 340 as we believe that i) earnings potential of domestic operations will remain capped with increased coking coal prices and dilution of regulatory support measures at current global steel prices, ii) earnings from residual European operations remain vulnerable to global oversupply and iii) balance sheet deleveraging would remain delayed beyond FY18E. Q2 results were well below even our lower than consensus estimates due to weak performance of standalone business. The probability of strong recovery in global spreads remains low in the wake of adverse global factors (overcapacity in China and increase in iron ore/coking coal costs). Valuations remain pricey and risk reward unfavourable.

We remain concerned on large debt pile which is unlikely to reduce before FY18E. We realign our fair value multiple to 6x (vs 5.5x earlier) as regulatory support (AD duties) is more medium term in nature (vs a temporary relief earlier) and steel demand-supply scenario is relatively better globally. We value TISCO at 6x Mar’18E EV/EBITDA to arrive at our revised TP of Rs 340. Reiterate Sell and recommend switch to non-ferrous names like Vedanta/Hindalco. Key upside risks are higher steel prices and value accretive JV for European operations with ThyssenKrupp.