Analysts Remain Bullish On Tata Steel After Q3, But Stock Swings

Most analysts maintained their bullish investment recommendation for Tata Steel Ltd., lauding its deleveraging efforts, improved India business and better operating income even as the European unit disappointed.

The steelmaker’s revenue in the quarter ended December jumped to more than seven-quarter high and operating profit was the highest in at least nine quarters. It also reported net profit of Rs 3,989 crore in the reported period against a loss of Rs 1,166 crore a year ago.

The company’s European division, however, reported an Ebitda per tonne loss at $46 against a loss of $27 a tonne in the preceding three months. That was driven by a one-off pertaining to reversal of wage support from the Netherlands government and higher provision of carbon emission.

But that didn’t deter analysts as they derived optimism from Tata Steel’s efforts to pare debt. The company reduced net debt by Rs 18,609 crore and gross debt by Rs 7,649 crore for the nine months ended December, and further guided to lower gross debt by more than Rs 12,000 crore in the fourth quarter of the current fiscal.

Shares of Tata Steel rose as much as 3.6% in early trade on Wednesday but pared all of the gains to trade 0.86% lower around 11 a.m. Of the 29 analysts tracking the company, 22 have a ‘buy’ rating, five suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data.

Here’s what brokerages have to say about Tata Steel’s third-quarter results…

JPMorgan

• Remains ‘overweight’; raises target price to Rs 960 from Rs 880 apiece
• Highest-ever consolidated Ebitda; expects fourth quarter to be even stronger than third
• Lagged impact of steel price hikes, likely interim auto contract resets fourth quarter higher
• Restarting pellet and cold-roll mill spending; Tata Europe split process underway
• Increases FY21 estimates by 63%; maintains conservative forecasts for FY22-23
• Implies FY22 India Ebitda/tonne at Rs 15.5 against third quarter at Rs 20.1
• Conservative outlook for FY22-23 despite building expectations (Rs 12 K/t) decline in steel realisations

Credit Suisse

• Maintains ‘outperform’ rating; target price at Rs 630 apiece
• Third quarter FY21 consolidated adjusted Ebitda missed estimates by 14%
• Miss largely driven by negative Ebitda in Europe
• India’s Ebitda was largely in line at $260/t (vs $256/t Credit Suisse estimates, +$96/t quarter-on-quarter)
• Europe one-offs drive miss in third quarter; strong deleveraging continues
• Indian spreads remain strong

Jefferies

• Maintains ‘buy’ with a target price of Rs 850 apiece
• Tata’s third quarter adjusted Ebitda rose 53% quarter-on-quarter (up 2.1x year-on-year) and came 8% above Jefferies’ estimate
• India business delivered solid results led by strong steel prices
• Tata Steel Europe margin fell quarter-on-quarter on higher carbon provisions, reversal of government wage support
• Tata generated free cash flow of Rs 12,100 crore in third quarter and net debt fell by Rs 90/sh

Investec

• Maintains ‘buy’ with a target price of Rs 850 apiece
• Balance sheet deleverages, Tata Steel Europe metrics clouded by carbon; capital structure shift
• Tata Steel India posted solid numbers as a result of higher prices, better mix, lower exports
• Focus on sustainability; targets/disclosures encouraging