Tata Steel shares get 'Reduce' from Kotak post 20% rally. Here's new stock price target

The risk reward on te Tata Steel stock has turned unfavorable, said Kotak Institutional Equities, which has cut its rating on the stock to 'Reduce' from 'Buy' but increased its share price target on the same to Rs 145 from Rs 140 earlier.

Kotak said Tata Steel has seen a 20 per cent rally in the past two months, mainly led by broader market buoyancy. But at the same time, fundamentals have deteriorated at the margin, with raw material outperforming steel prices, suggesting a downward pressure on India’s spreads from 4QFY24. Kotak said there is a persistent pressure in Europe’s steel spreads while there i sa risk of delay in UK’s resolution and completion of the KPO-II 5 mtpa expansion.

"We see risk-reward at the current price unfavorable after the recent rally. We increase our FV to Rs 145 (from Rs 140) on roll-forward and downgrade our rating to REDUCE (from BUY)," Kotak said.

tatasteel-share-price-361967?utm_source=topic&utm_medium=topic&utm_campaign=topic">Tata Steel shares are up 7 per cent in the last one month and 23 per cent in the last six months.

Kotak said coking coal prices for Tata Steel remained elevated at $300-350 per tonne in the December quarter and that the supply disruptions in Australia should keep prices elevated. "Higher raw material and weaker steel prices suggest downward pressure on steel margins from 4QFY24. Domestic demand remains robust at 15 per cent in 8MFY24, but Tata Steel would benefit only partially due to lack of new capacity," Kotak said.

Kotak said the Europe business has been reporting sharp losses since Q3FY23, with average Ebitda loss of $109 per tonne, led by weak spreads and major maintenance shutdown in the Netherlands. It expects losses to continue, given weak spreads.

"UK assets are approaching end of life and media reports suggest negotiations with unions on job cuts and new investments face opposition. We forecast Ebitda of $19/51 per tonne in FY2025/26E against a loss of $155 in Q2FY24," it said.

Kotak said Tata Steel is well-positioned in the Indian market, with a potential to reach 40 mtpa capacity (from 24 mtpa in FY2025E) from low-cost brownfield expansions. But it sees Europe continuing to consume the management bandwidth and India’s balance sheet for new investments in the UK. Europe could thus potentially slow down expansions in India, it said adding that the brokerage sees it as a key de-rating risk.

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