Tata Steel’s FY22 prospects shine on deleveraging, better Europe outlook

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Indian steel stocks have come off their peaks after a strong run, and Tata Steel Ltd is no exception here. The company’s shares have declined by around 12% from their 52-week highs seen in May on the National Stock Exchange.

However, this does not seem to have dampened the outlook for Tata Steel in the eyes of analysts and investors. What works for the company is its improved realizations in the domestic market, the fact that its operations are a well-oiled integrated machine and that it has expansions planned. The cherry on top is the recent improvement in European profitability.

“While Tata Steel Europe’s (TSE) Ebitda per tonne improved in Q4 to $66 a tonne, we expect Ebitda per tonne to cross $100 a tonne in H1FY22 given the sharply elevated spreads," analysts at J.P. Morgan India Private Limited wrote in a note. Ebitda is earnings before interest, tax, depreciation and amortization.

Analysts point out that European steel prices are well above historical averages, helped by robust demand. Any extension in European safeguard measures should help improve TSE’s earnings visibility, though the dependence on external raw materials such as coal could pose a challenge.

However, the company can pass on the impact of any rise in prices to its contracts, analysts reckon. That said, stringent carbon emission norms in Europe may pose a challenge for the company.

Investors also appreciate Tata Steel’s focus on deleveraging. “With Tata focused on debt reduction and the likelihood of TSE Ebitda over the next three years settling at a higher level versus the average of the last few years, we believe Tata is an ideal candidate for a re-rating," said J.P. Morgan analysts. The broking firm estimates that Tata Steel’s FY22 net debt will be at a nine-year low.

Tata Steel’s March-quarter performance reflected the booming steel cycle. Not only did the company’s standalone Ebitda per tonne jump 39% sequentially, but the performance of its subsidiaries also improved. The recent price hikes in the domestic market fortify an already strong profitability of domestic operations.

Domestic hot-rolled coil (HRC) prices were up 20% sequentially after price hikes in the first fortnight of June. Being an integrated manufacturer with captive supplies of coal and iron ore, the company’s performance is expected to remain robust. “While Tata Steel’s royalty costs increased in FY21 in line with higher iron ore price, estimated FY21 delivered iron ore cost of $36 per tonne in FY21 was one of the lowest in the world, helping generate strong operating leverage," pointed out Ambit Capital Research.

Meanwhile, TSE is working on separating the UK and Netherlands businesses to enhance accountability, though Tata Steel’s focus on domestic operations continues. “The share of higher-margin India in volumes is up from 28% in FY12 to 61% in FY21 and should rise to 66% post ramp-up of the new 5mtpa plant," pointed out Jefferies India Pvt. Ltd in a report on 16 June.

Data from Bloomberg shows that the average target price for the Tata Steel stock based on estimates of 25 brokerage firms is ?1,393 per share.

This is more than 20% higher than the company’s share price of ?1,092 apiece. Investors would do well to follow steel prices and news flow on China’s policies. Some analysts said the latest hawkish tilt of the Federal Open Market Committee of the US in the recent meeting because inflation concerns is worrisome for steel prices.

Source: Live Mint

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