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Centrum Broking
Tata Steel (Buy)
CMP: ₹480.4
Target: ₹660
Key takeaways:
Tata Steel indicated that spreads could be lower Q4 onwards, led by lower steel prices (average q-o-q fall of about ₹3,000/tonne expected) partly mitigated by lower costs. Deleveraging efforts have been stepped up with the announcement of the divestiture of SEA operations, resulting in net debt reduction of $500 million. Management reiterated its guidance of reducing net debt by $1 billion over the next one year, saying this could be achieved even earlier. We adjust our costs and steel pricing estimates and reduce consolidated EBITDA estimate by 5 per cent/8 per cent for FY19E/20E, respectively.
Valuation and risks: We are upbeat on Tata Steel’s prospects. Our comfort is derived from its healthy balance sheet as it shifts European operations to a joint venture in FY20E. In addition, Tata Steel generates strong cash flows from residual businesses led by low-cost domestic operations, to be further strengthened in the next few years as synergies and scale benefits are realised at BSL, KPO and UML.
We value Tata Steel using SOTP and arrive at a fair value of ₹660. Maintain Buy.
Risks: Downside risks to our call are a sharp fall in steel prices/spreads and more asset acquisitions.
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