August8 , 2022

Tata Steel Shares Surge, Brokerages Say May Deliver Up To 58% Returns; Know Details

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Tata Steel Share Price: Tata Group’s steel company Tata Steel is witnessing a recovery from low levels. The stock has jumped nearly 7 per cent from its record low of June 23, 2022. However, right now this stock is at a discount of about 43 per cent from its record high. This is due to volatility in commodity prices due to geopolitical tensions seen in metal stocks. While steel prices in India have corrected sharply to Rs 60- Rs 61k/t, domestic demand has also recovered sharply as consumer de-stocking is behind us. Analysts at JPMorgan do not see further declines in the domestic steel market. The foreign brokerage firm has an ‘overweight’ stance on the stock with a target price of Rs 1,400, which implies a more than 58 per cent upside from the current market price.

“Overall Tata Steel remains committed to ~$1 bn net debt reduction, and we see upside risk to this number if underlying earnings hold up at current levels. With the combination of working capital release and elevated underlying earnings, Tata Steel should deliver another year of material net debt reduction,” the note stated.

While markets are likely to fear an immediate recession, JPMorgan believes the steel market is also facing a series of one-off issues (export tax, China demand decline on COVID-19, rains) that should ease.

“Tata Steel’s Europe footprint has materially declined, and India should continue to increase. TATA’s KPO expansion of 5MT, large captive iron ore mining ramp-up and new brownfield expansion pipeline yield strong volume visibility with an improving balance sheet,” it added.

Though, key downside risks to its rating and price target include a sharp decline in steel spreads and a sharp decline in steel demand in India, the brokerage said.

“While TATA has attractive growth optionality across multiple sites in India (NINL, KPO, Meramandali), we believe the key constraint for TATA (and the large Indian Resource companies) is NOT capital, but how to deploy it aggressively on the ground. Large projects remain difficult to execute on time given labor mobilization and contractor issues. TATA’s 5MT KPO should be commissioned in 2HFY24, and post that we would expect TATA to start work on the next expansion,” JPMorgan’s note stated.

Elsewhere, Moody’s Investors Service has changed Tata Steel’s outlook to positive from stable. The outlook change to positive shows the domestic steel giant’s track record of delivering a solid operating performance while maintaining conservative financial policies and the likelihood that upward rating pressure will build over the next 12 months if the recent performance and credit metrics improvements are sustained.

“Tata Steel’s well-laid-out capital allocation policy that prioritises debt reduction over capital expenditure and new investments underscores our positive outlook,” Kaustubh Chaubal a Moody’s Senior Vice President said.

The sizable debt reduction achieved over the last two years, as well as the reduction to come over the remainder of FY’23, will largely improve the company’s financial flexibility and resilience and position it for an investment-grade rating, Chaubal said.

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