Prabhudas Lilladher has given Buy recommendation for Tata Steel with a target price of Rs. 1705 in its research report issued on May 05, 2022

Prabhudas Lilladher’s research report on Tata Steel

TATA steel (TATA) reported Q4FY22 EBITDA below our estimates by 13% at Rs158.9bn (down 5.4% QoQ/+6% YoY). The miss was primarily due to lower than expected margins in India operations and one-time provision of Rs13.4bn in Tata steel mining, the mining subsidiary. While Tata steel Europe (TSE) delivered strong beat of 47% on back of higher prices. Continued relaxation of policies for real-estate sector and front loading of infrastructure spending reflects visible pressure on Chinese authorities to stimulate economic activity given the meaningful slowdown witnessed over last couple of quarters and reemergence of covid-19. While, concerns on oversupply resulting from contraction in demand were addressed by commensurate curbs on production by authorities. Unlike past, this limited the intensity of Chinese mills to dump steel in exports markets. Amid low competitive intensity of Chinese mills and constrained steel supplies from Russia and Ukraine, abnormal coking coal prices at US$520/t would remain pressure point for earnings of steel companies.

Outlook

Notwithstanding that, margins of Indian steel mills are significantly better than historical levels on back of elevated spreads. Underpinned by solid B/S, sound earnings outlook (with FY23e margins lower by 23% over Q4FY22) and attractive valuations, we reiterate BUY with TP of Rs1,705, EV/EBITDA of 5.7x FY23e.

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