Tata Steel shares at Rs 130? Stock underperformance overdone, says Kotak

The recent weakness seen in Tata Steel shares is overdone, said Kotak Institutional Equities, as the domestic brokerage upgraded the stock to 'Buy' with a revised target of Rs 130. The stock target, at Monday's closing level of Rs 105.65 on BSE, suggests a 23 per cent potential upside for the Tata group scrip.

Tata Steel Ltd shares have fallen 17 per cent in the last one year compared with an 8.34 per cent drop in the BSE Metal index.

Kotak Institutional Equities said domestic steel margins for Tata Steel have bottomed out and should recover to mid-cycle levels from March quarter onwards. Multiple upcoming growth and margin accretion projects should further aid earnings, it said adding that while weakness in Europe operations is likely to continue in the near term, the worse is behind.

"The Chinese steel spreads remain below mean and have upside risks in case of stimulus-led strong demand from 2HCY23. We increase our Fair Value to Rs 130 and upgrade the stock to BUY," it said.

Kotak, which had a 'Reduce' rating on the stock (Rs 115 target), said the stock trades at attractive 5 times EV/Ebitda FY25E against its target of 6.4 times and offers attractive risk-reward.

It felt that Tata Steel is well-positioned in the Indian steel market and has a potential to reach

40 mtpa capacity (from 24 mtpa in FY2025E), thanks to low-cost brownfield expansions at its existing plants.

"We expect the company to announce the next phase of growth investments in the coming 6-12 months. Any incremental investments in Europe, particularly from the India entity, is a key downside risk to our investment thesis," it said.

Kotak said margins of European operations have sharply declined in the past six months due to demand-

led price weakness. It expects Ebitda losses to continue for a few quarters but should improve gradually. The brokerage said Tata Steel's UK assets are approaching end of life and that the company has been gradually divesting the pension ownership.

A potential closure or divestment of the UK business provides upside risks, it said.

"We believe Tata’s India steel margins have bottomed in 2QFY23. We expect margins to recover further in coming quarters, after a mild recovery in 3QFY23, led by recent price hikes, stable raw material costs and operating leverage on stronger volumes. We are factoring standalone Ebitda at Rs 14,135 per tonne and Rs 14,500 per tonne in FY2024 and FY25E againts Rs 9,997 per tonne in 3QFY23," Kotak said.

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