Tata Steel Ltd
(BSE Code: 500470) (CMP: Rs.574.95) (FV: Rs.10) (TGT: Rs.750+)
Established in 1907, Mumbai-based Tata Steel Ltd (TSL) manufactures and distributes steel products. It offers hot-rolled (HR) and cold-rolled (CR) coated steel coils and sheets, precision tubes, tire bead wires, spring wires, and bearings; auto ancillaries for the automotive market; and bearings, galvanized iron wires, agriculture and garden tools, conveyance tubes, fencing, farming and irrigation equipment for the agriculture market. It also provides steel doors and windows, roofing sheets, plumbing pipes, tubes, prefabricated and rooftop houses, water kiosks, modular toilets, office cabins, corrosion-resistance steel, cut and bend bars, PC strands, ground granulated blast furnace slags, etc. In addition, it offers CR, coated, HR, tube, wire rod, ferro chrome and manganese, boiler tube, pipe, ferroshot and metallic products for use in panels and appliances, fabrication and capital goods, furniture, LPG and welding applications as well as process industries such as cement, power and steel in the industrial and general engineering markets. The Usha Martin (UML) acquisition by TSL was a smart move. It was done at 30% discount to greenfield capex cost as the plant has strong backward integration and an attractive long products portfolio in close vicinity to TSL’s facilities. We believe that several operational issues have plagued UML’s operational performance over the years and expect TSL to achieve a much better operational and financial performance from the same asset. We see several synergies and expect EBITDA to improve by Rs.1500-2000/tonne. We also expect TSL to abandon its further inorganic acquisitions efforts given that UML has given the long products exposure it was looking for. Though the acquisition looks pricey on
trailing financials, we believe that it does not represent the potential and hence, an undue attention to the same might be unwarranted.
Despite factoring in the acquisitions of both UML and Bhushan Power & Steel, we expect Net Debt/EBITDA for consolidated operations (excluding its European business) to remain in a comfortable zone of 3.1x (v/s 2.9x at FY18 end) which allays street’s concerns on TSL’s balance sheet getting stretched again. We believe that a much larger asset base of TSL’s domestic business, shifting of European business to JV with ThyssenKrupp and its large cash flows in the current steel cycle will help keep the balance sheet in a healthy position.
TSL currently enjoys strong spreads and cash flows in its domestic business led by strong steel pricing, backward integration benefits and improved conversion cost metrics. The management’s goal of doubling capacity in India over the next 5 years is within reach with the acquisition of 6 MMTPA capacities and KPO phase II expansion of 5 MMTPA. We will keenly look for management views on further participation in inorganic growth but expect it to halt now and hence, expect TSL to not pursue Bhushan Power & Steel now.
We see domestic asset acquisitions being value accretive in the medium-to-long term due to attractive product portfolios and strong possibility of material synergies. We also draw comfort on the balance sheet front due to shifting of European operations to JV and strong cash flow generation in the residual business led by low cost domestic operations.
Technical Outlook: The stock looks good on the daily chart for medium-term investment. It has formed a downward channel pattern on the daily chart and a close above Rs.610 with good volumes will push the stock higher. The stock trades below all important moving averages like the 200 DMA level on the daily chart. Start accumulating at this level of Rs.574.95 and on dips to Rs.530 for medium-to-long term investment and a possible price target of Rs.750+ in the next 12 months.