Buy Tata Steel; target of Rs 1776: Anand Rathi

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Anand Rathi's research report on Tata Steel

The Consolidated revenue increased during the quarter by 12.9% QoQ and 54.8% YoY to Rs. 602.8 billion. Tata Steel achieved a new highest ever quarterly consolidated EBITDA of Rs. 164.5 billion, which reflects a margin of 27.3%. The consolidated profit after tax was also one of the highest at Rs. 123.6 billion with a net profit margin of 20.5%. During the quarter, Tata steel standalone business deliveries improved 10.4 % QoQ to 4.58 mn tons, While consolidated front steel production fell by 1.4% to 7.77 mn tons, steel deliveries increased by 3.9% to 7.39 mn tons in Q2 FY22 over Q1 FY22. As compared with Q2 FY21, the steel production is higher by 7.2% but deliveries are lower by 6.8%, despite market demand contraction amidst seasonal weakness, and this is a testament to their strong customer relationships and a superior distribution network. Sales volume to the Automotive segment increased by 18% QoQ despite semiconductor shortage driven weakness in the sector.

Outlook

After a strong performance in H1FY22, we expect the rest of the year to be stronger for Tata Steel standalone operations. Domestic steel prices are at a discount to import parity prices allowing companies to push through price hikes. Iron ore integration in the domestic operations enables the company to capture the increase in steel prices in profits. European operations are also expected to remain profitable with an improvement in spreads which lead to further fall in net debt over FY22-FY24 even though Tata Steel will continue to pursue growth capex in India. Hence, we reiterate our BUY rating on the stock with target price of Rs. 1,776.

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