Share price Tata Steel: Tata Group’s steel company, Tata Steel, is witnessing a recovery from low levels. The stock is up nearly 7 percent from its record low of June 23, 2022. Right now, however, this stock is discounting about 43 percent from its record high. This is due to the volatility of commodity prices due to geopolitical tensions in metal stocks. While steel prices in India have sharply corrected to Rs 60- Rs 61k/t, domestic demand has also recovered strongly as consumer de-stocking is over. Analysts at JPMorgan see no further declines in the domestic steel market. The foreign brokerage firm has an ‘overweight’ stance on the stock with a price target of Rs 1,400, representing an increase of more than 58 percent from the current market price.
“Overall, Tata Steel remains committed to net debt reduction of approximately $1 billion, and we see upside risk to this number if underlying earnings remain at current levels. With the combination of the release of working capital and higher underlying earnings, Tata Steel should deliver another year of material net debt reduction,” the note said.
While markets are likely to fear an immediate recession, JPMorgan believes the steel market is also facing a series of one-off issues (export tax, decline in demand in China due to COVID-19, rain) that should ease.
“Tata Steel’s footprint in Europe has decreased significantly and India should continue to grow. TATA’s 5MT KPO expansion, large scale ramp-up of captive iron ore mines and new brownfield expansion pipeline provide strong volume visibility with improving balance sheet,” it added.
However, the main downside risks to its rating and price target are a sharp decline in steel spreads and a sharp decline in steel demand in India, the brokerage said.
“While TATA has attractive growth opportunities in multiple locations in India (NINL, KPO, Meramandali), we believe that the main constraint for TATA (and the major Indian Resource companies) is NOT capital, but how it can become aggressive on the ground deployed. Major projects remain difficult to complete on time given labor mobilization and contractor issues. TATA’s 5MT KPO should be commissioned in 2HFY24, and we would expect TATA to start working on the next expansion,” said JPMorgan’s note.
Elsewhere, Moody’s Investors Service has changed Tata Steel’s outlook from stable to positive. The change in outlook to positive shows the domestic steel giant’s track record of delivering a solid operating performance while maintaining conservative financial policies and the likelihood that upward rating pressures will intensify over the next 12 months as recent improvements in the in terms of performance and creditworthiness.
“Tata Steel’s well-thought-out capital allocation policy, which prioritizes debt reduction over capital expenditures and new investments, underlines our positive outlook,” said Kaustubh Chaubal a Moody’s Senior Vice President.
The significant debt reduction achieved in the past two years, as well as the reduction that will take place in the remainder of FY’23, will significantly improve the company’s financial flexibility and resilience and position it for an investment-grade rating, Chaubal said.
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