Buy Tata Steel, target price Rs 330: Edelweiss

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EdelweissNSE -4.82 % has given a buy rating to Tata Steel with a target price of Rs 330 based on 7.5 times FY22E EBITDA.
Tata Steel BSL’s Q4FY20 performance surpassed estimates. The key highlights are: i) Raw material cost fell 23 per cent year on year (18 per cent quarter on quarter) mainly due to restocking. ii) Blended realisation rose 9 per cent quarter on quarter, mirroring headline steel prices. iii) Debt remains stable year on year.

Going ahead, the brokerage expects headwinds in FY21E as the impact of Covid-19 would probably mar volumes up to ~10 per cent. That said, FY22E is expected to bring cheer as demand is expected to revive by then.

Tata Steel share price moved down by -2.70 per cent from its previous close of Rs 283.60. The last traded stock price is Rs 275.95. Incorporated in 1907, Tata Steel has a market cap of Rs 33221.86 crore.

Investment Rationale

The brokerage expects FY21E to be the worst in a decade for all steel companies owing to the drawn-out Covid-19 woes. The management has indicated that demand is going to be depressed in the short term. Channel checks suggest that crude steel capacity utilisation is still languishing at ~50 per cent; hence, The first quarter of FY21E is likely to be particularly weak for the company. That said, FY22E EBITDA is expected to normalize to Rs 7,500/t anticipating that demand would have recovered by then.

Despite ongoing weakness in the auto sector, the company showed a significant improvement in EBITDA mainly due to cost efficiencies and better realisation. While FY21E is likely to be a washout, we expect normalcy to return in FY22E.

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 34774.29 crore, up 2.42 per cent from last quarter sales of Rs 33953.75 crore and down -14.05 per cent from last year’s same quarter sales of Rs 40457.11 crore. The company reported net profit after tax of Rs -1249.01 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 34.41 per cent stake in the company as of March 31, 2020 while FIIs held 12.39 per cent, DIIs 29.36 per cent and public and others 29.32 per cent.

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