Buy This Metal Stock For 42% Upside Says IDBI Capital

Q2FY22 results of Tata Steel

According to the brokerage “Tata Steel’s Q2FY22 EBITDA was slightly below our estimate. India sales volumes increased by 11% QoQ to 4.58 mn tonnes and India operations EBITDA/t declined 10% QoQ to Rs29,256 due to rising coking coal costs.”

IDBI Capital has said that “Nevertheless, European operations EBITDA/t increased 136% QoQ to Rs15,609 led by inventory gain and higher prices despite lower deliveries. Consolidated net debt fell Rs51 bn QoQ to Rs689 bn ($2 bn deleveraging is likely in FY22 despite growth CAPEX given upswing in steel cycle).”

Key highlights and investment rationale for Tata Steel according to IDBI Capital

European business financial performance stellar: European EBITDA increased 2.2x QoQ to Rs33 bn despite flattish sales volumes of 2.1 mn tonnes. Tata Steel SEA registered an increase of 12% QoQ EBITDA to Rs4 bn (EBITDA/t of Rs7,244). However, Tata Steel Long Products EBITDA declined by 45% QoQ to Rs3 bn (EBITDA/t of Rs18,010) due to a sharp increase in raw material cost.

Free cash flows strong; expansion on track: Despite working capital increase of Rs38 bn and CAPEX of Rs21 bn, its free cash flow was strong at Rs39 bn in Q2FY22. Its 5 mtpa expansion continues to progress well while it has fast-tracked a 6 mtpa pellet plant. Total CAPEX outlay for FY22 is likely at Rs100-120 bn.

Outlook: After a strong profitability performance in H1FY22, we expect H2FY22 to be stronger for Tata Steel India operations as Chinese steel curbs are likely to keep steel prices firm. Also, we believe strong profitability and restructuring at its European operations will lead to a further fall in net debt over FY22-FY24 even though Tata Steel will continue to pursue growth CAPEX in India. Hence, we maintain our BUY rating on the stock.

Buy Tata Steel with a target price of Rs 1,825

IDBI Capital has said in its research report that “We introduce FY24 estimates in this report and roll over our valuation to FY24 estimates. We raise our FY22/FY23 EBITDA estimates by 10%/15% given firm steel prices which we expect to sustain over the coming one year. We raise our SOTP-based target price to Rs1,825 (earlier Rs1,735) and maintain our BUY rating on the stock.”

Disclaimer

This stock is picked from the brokerage report of IDBI Capital. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.