Prabhudas Lilladher’s recommendation to buy Tata Steel with a target price of Rs. 144, as outlined in their research report dated September 18, 2023.
Tata Steel: Forging a Sustainable Future
Prabhudas Lilladher has expressed a bullish outlook on Tata Steel, particularly focusing on developments in the company’s steel-making facility in Port Talbot, UK.
Key Factors Driving the Buy Rating:
- Green Steel Initiative: Tata Steel has proposed the establishment of a 3 million metric tonnes per annum (mtpa) Electric Arc Furnace (EAF) at its Port Talbot steel-making facility, involving a capital expenditure (capex) of GBP 1.25 billion. This project aligns with the company’s green steel initiative and is set to receive substantial support from the UK government in the form of a GBP 500 million grant, covering 40% of the project cost. This initiative aims to facilitate the transition to green steel production in the UK within a competitive landscape.
- Policy Support: The proposed project is expected to receive adequate policy support to ensure a smooth transition to green steel manufacturing. This support further strengthens the viability of the initiative.
- EPS Accretive Transition: The transition of Tata Steel UK (TSUK) to green steel production is anticipated to be earnings per share (EPS) accretive for several reasons:
- Current cash losses associated with TSUK will cease as the company imports substrate rather than producing it at older facilities.
- Although there will be one-time costs, TSUK is expected to be in a better financial situation compared to the previous scenario of recurring cash burn.
- The project reduces the vulnerability of TSUK to fluctuations in coking coal prices.
- The shift towards renewable energy sources is likely to lead to a decrease in energy costs.
Prabhudas Lilladher’s Recommendation:
In light of these developments and their implications for Tata Steel’s financial performance, Prabhudas Lilladher maintains a “Buy” rating on the stock. They have revised their target price (TP) to Rs. 144 per share, reflecting an EV/EBITDA multiple of 5x for Tata Steel Europe’s (TSE) FY25E EBITDA.
Outlook:
Prabhudas Lilladher has revised their FY25E EBITDA estimates upwards by 5% to Rs. 411 billion and introduced FY26E earnings estimates. This reflects their confidence in the positive impact of the green steel initiative and transition on Tata Steel’s financial performance.
In summary, Prabhudas Lilladher’s bullish stance on Tata Steel is grounded in the company’s commitment to green steel production, robust government support, and the expectation of an EPS accretive transition. These factors have led to a “Buy” rating with a target price of Rs. 144.
