According to a Motilal Oswal, Tata Steel will not benefit from inexpensive ore, Russian coal.
Tata Steel, buzzing stock
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Tata Steel share price came into focus after Citi maintained a buy call on the stock. The stock has tanked over 32 percent in the last 3 months amid inflation, interest rate hikes and export duty concerns.
At 09:50 am, the stock was trading at Rs 877, up Rs 15.80 or 1.83 percent. It has touched an intraday high of Rs 882.00 and an intraday low of Rs 865.10.
Metal stocks have been under pressure from lockdowns and slowdown in China. Central banks raising interest rates to mitigate inflationary pressures and an expected economic slowdown are also major reasons for the decline.
The government surprised the industry with an export duty with effect from May 22. The duty is 50 percent on all grades of iron ore, 45 percent on pellets and 15 percent on non-alloy steel except part of semi-finished steel.
According to the Indian Steel Association (ISA), the duty on steel would send a negative signal to investors and impact capacity utilisation. India could lose export opportunities and the decision could impact overall economic activity, it said.
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Analysts said that duty on iron ore may result in higher domestic supply and will likely bring down prices. For steel firms like Tata Steel, JSW Steel and JSPL, exports account for 15-20 percent of overall sales.
Global research firm Citi has retained a buy rating on Tata Steel but has cut target to Rs 1,085 from Rs 1,800 per share. It has cut EBITDA estimate by 32/34% on lower realisations.
“Tata Steel stock may not hit the 2020 trough of 0.5x given China stimulus expectations. Balance sheet is also strong, perhaps strongest in the last 15 years,” it added.
According to a Motilal Oswal research report, Tata Steel will not benefit from inexpensive ore and Russian coal. It believes Tata Steel standalone 1HFY23 EBITDA is likely to contract by 66% over 1HFY22 driven by lower ASP, lower demand and peak coking coal costs and high base effect.
“India operations will not benefit from lower iron ore costs or discounted Russian coal. Hence, the cost structure will only benefit from the reduction in coking coal prices that too for 70-75% of requirement as India operations are captive on coking coal for the balance,” it said.
Motilal Oswal has cut FY23E consolidated EBITDA by 22%, driven by 34% reduction in standalone EBITDA offset by 4% increase in TSE EBITDA. The reduction in domestic EBITDA is a combination of lower than expected sales volume, reduction in ASP and higher than estimated coking coal cost. It has maintained its neutral rating on Tata Steel with a revised target of Rs 965 (against Rs 1,410 earlier) based on SoTP.
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