Kotak Upgrades Tata Steel To 'Buy' On Attractive Risk-Reward Ratio

The stock trades at 5 times its EV/Ebitda ratio for FY25 versus Kotak's target of 6.4 times, offering "attractive" risk-reward.
<div class="paragraphs"><p>Steel rolls sit inside Tata Steel's plant. (Source: Company website)</p></div>
Steel rolls sit inside Tata Steel's plant. (Source: Company website)

The attractive risk-reward ratio of Tata Steel Ltd. has led Kotak Institutional Equities to upgrade the stock to 'buy' and raise its fair value.

The company's target price was raised to Rs 130 apiece from Rs 115 apiece, the brokerage said in a March 6 investor note. This implies an upside of 22.6% over the next 12 months.

The stock trades at an attractive 5 times EV/Ebitda ratio for fiscal 2025 versus Kotak's target of 6.4 times and offers an "attractive" risk-reward ratio, the brokerage said.

The stock closed 0.85% higher at Rs 106.55 apiece, compared to a 0.24% gain in the benchmark Nifty 50.

Of the 32 analysts tracking the company, 24 maintained 'buy', five suggested 'hold' and three recommended a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 16.9%.

Most of the metal stocks have been trading lower year-to-date, with the Nifty Metal Index falling 15.67% during this period. Tata Steel, however, performed better than the larger index by declining 5.55% in comparison.

Tata Steel shares also found support from 1 million shares changing hands in a bunched trade earlier on Wednesday, according to Bloomberg.

Domestic Margins To Recover

Tata Steel's India margins, after seeing mild recovery in the third quarter of fiscal 2023, will recover further in the coming quarters led by recent price hikes, stable raw material costs and operating leverage on stronger volumes, according to Kotak.

The company's domestic margins bottomed out in the second quarter of fiscal 2023, the brokerage said. It is factoring a standalone Ebitda of Rs 14,135 and Rs 14,500 per tonne in fiscal 2024 and 2025, respectively, versus Rs 9,997 per tonne in the third quarter of fiscal 2023.

In addition, the steel producer's upcoming projects will likely aid its earnings. The brokerage estimated volume growth of 4%, 3%, and 11% in fiscal 2023, 2024, and 2025, respectively, it said.

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Europe Margins To Remain Subdued

The operational losses in Europe are expected to continue for a few more quarters, the brokerage said, although they should improve gradually from the third quarter of fiscal 2023 levels.

The U.K. assets are approaching the end of their useful lives, and Tata has been gradually divesting the pension ownership.

A potential closure or divestment of the U.K. business provides upside risks, Kotak said. It forecast Ebitda of more than $22 per tonne and $38 per tonne in fiscal 2024 and 2025, respectively, compared to an Ebitda loss of $95 per tonne in Q3 of fiscal 2023.

The company will announce the next phase of growth investments in the next six to 12 months, according to Kotak Institutional Equities. Tata is "well-positioned" in the Indian steel market and has the potential to reach 40 million tonne per annum capacity from low-cost brownfield expansions at its existing plants, it said.

"Any incremental investments in Europe, particularly from the India entity, are a key downside risk to our investment thesis," the company said. 

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Swastika Mukhopadhyay is a desk writer at BQ Prime, who...more
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