JM Financial has a buy call on Tata Steel with a target price of Rs 745.
The current market price of Tata Steel is Rs 581.60.
Time period given by the brokerage is one year when Tata Steel price can reach the defined target.
Investment rationale by the brokerage:
Robust performance at Indian operations: Tata Steel India reported a revenue growth of c.9.1 per cent QoQ, driven by a) 6.8 per cent YoY increase in volumes and b) c.2.2 per cent YoY increase in realisations. EBITDA came in at Rs 60bn (+18.2 per cent QoQ), significantly higher vs. JMfe of Rs 52.7bn, primarily driven higher blended realisation. Blended EBITDA/t increased from Rs 17.1k/t in 1QFY19 to Rs 18.9k/t in 2QFY19.
Muted performance at Corus driven by higher costs: Corus EBITDA per ton came in at USD 70/ton in 2Q as against JMfe expectation of USD 76/ton driven by higher costs. EBITDA declined 36.2 per cent QoQ to USD 159mn, primarily driven by higher raw material and energy costs.
South East Asia operations benefit from improved realisations: South East Asian operations reported a 14 per cent QoQ revenue growth, driven by improved deliveries at Nat steel and better realisations at both Nat Steel and Tata Steel Thailand. EBITDA remained flat QoQ at Rs 1.1bn in 2Q.
Bhushan steel continues margin expansion: Bhushan steel earlier reported a revenue growth of c.26.8 per cent YoY to Rs 58.6bn in 2QFY19, driven by 34.1 per cent increase in volume, partially offset by 5.5 per cent decline in realisation. Volumes benefited from improved marketing strategy which aided in inventory reduction. EBITDA increased 42 per cent QoQ to Rs 11.8bn. EBITDA/t increased from Rs 9.7k/t in 1QFY19 to Rs 10.3k/t in 2QFY19. Tata Steel expects full synergy to kick in once Bhushan steel achieves production of 5mtpa in 24 months.
Organic/inorganic growth strategies on track: In Jun18, Tata Steel and thyssenkrupp AG signed definitive agreements to form a 50:50 JV in Europe. The expansion plan of 5mn tons of capacity at Kalinganagar is on track with an estimated project cost of Rs 235bn, including Rs 160bn up to HRC stage. Tata steel also signed a definitive agreement for the acquisition of steel business of Usha Martin via its subsidiary Tata Sponge Iron. The acquisition is expected to complete in 4QFY19.
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