Tata Steel Port Talbot plant deal: Analyst views, stock price targets & more

Market analysts are optimistic over Tata Steel Ltd deal with the UK government on decarbonising of 3 million tonne per annum (mtpa) steel plant at Port Talbot. As per the agreement, the Tata group firm will get 500 million British pounds in grant from the UK government to invest in Electric Arc Furnace (EAF) steelmaking, with the total capital cost of the project estimated at 1.25 billion pounds.

Tata Steel UK reported an Ebitda loss of 127 million pounds in FY23, which increased to an annualised 156 million pounds loss in Q1FY24. With life of Tata Steel's upstream assets (3mtpa BF-BOF) nearing their end and increasing carbon cost, analysts noted that the Tata Steel management has decided to replace the existing 3 mtpa BF-BOF assets with 3 mtpa EAF plant with the support of UK government.

Analysts noted the new facility will utilise scrap, which is readily available within the UK, making it more cost-efficient. "The UK currently produces an average of 10 mtpa of scrap, with a significant portion being exported. With the operation of this facility, a substantial amount of scrap can be used domestically. The project is expected to take about 36 months to complete, contingent upon obtaining all necessary regulatory approvals," Motilal Oswal said in a note.

Tushar Chaudhari, Research Analyst at Prabhudas Lilladher said that the Tata Steel UK transition is EPS accretive given current cash losses will end, as the company will import substrate instead of producing at old facilities. Chaudhari said one-time cost will exist, but Tata Steel UK is expected to be in better situation than earlier case of recurring cash burn, adding that the volatility in coking coal prices would not directly affect Tata Steel UK earnings.

Chaudhari said while first stage of the process stands complete with the agreement, consultations with unions involved are expected to close in next three months. "We revise our FY25 Ebitda estimates upwards by 5 per cent to Rs 41,100 crore and introduce FY26E earnings estimates. Maintain ‘Buy’ at revised target of Rs 144 (Rs 137 earlier) assigning EV/Ebitda multiple of 5 times for FY25E Ebitda for TSE," it said.

Motilal Oswal has maintained its price target at Rs 120 for now. "While progress towards resolving the UK facility, which is nearing the end of its useful life, is encouraging, we await more clarity on financials, write-offs and other operational details. We anticipate the release of these information in the upcoming months, particularly after the 2Q FY24 results," the domestic brokerage said.

Nuvama Institutional Equities said dip in earning losses and lower maintenance cost and working capital should be offset by capex involved in transition. It said the net additional cost should be one-time restructuring charges of $400 million, saying the future looks promising for UK operations with an estimated IRR of 15 per cent-plus.

"We believe value accretion due to lower losses at the UK operation FY25 onwards will be offset by the capex involved in the transition. We shall revise our numbers during Q2 once there is clarity on restructuring charges. Indian operations continue to do well and drive the stock. A stock dip, if any, shall be a buying opportunity," it said.

This brokerage has a 12-month target of Rs 142 on the stock.

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