Tata Steel share price hits 52-week high on £1.25 bln deal with UK government; here’s what analysts say

At 10:55 IST, Tata Steel shares were trading flat at ₹132 per share on BSE. According to Rajesh Bhosale – Equity Technical and Derivative Analyst, Angel One, Tata Steel stock experienced a robust gap up opening, but it failed to maintain momentum as there was no continuous buying activity, resulting in a decline from the morning highs. 

“Nevertheless, the overall sentiment remains optimistic, with a recommended buying range of 128 – 130, while the stock faces a significant hurdle at 140 as an immediate resistance level,” added Bhosale.

According to the company’s exchange filing, the project would increase the UK’s steel security and be the first significant step towards the local steel industry’s decarbonization, resulting in a reduction of direct emissions of 50 million tonnes over a ten-year period. With a high degree of circularity, it would make use of domestic scrap steel that is strategically available and encourage local value addition in the UK.

The proposed project would ensure that steelmaking would continue in Port Talbot after the switchover and make Tata Steel UK a lucrative, capital-efficient, and sustainable business. With the support of the UK Government, the project has a compelling investment case.

Additionally, the planned project includes restructuring Tata Steel’s balance sheet, potentially eliminating the ongoing cash losses in the UK business and the non-cash impairment of legacy investments.

“Tata Steel UK has been facing significant challenges due to the heavy end facilities approaching their end of life. The proposed project with one of the largest investments in the UK Steel Industry in recent decades, provides an opportunity for an optimal outcome for all stakeholders. 

We will undertake a meaningful consultation with the Unions on the proposed transition pathway in the context of future risk and opportunities for Tata Steel UK. With the support of the UK Government and dedicated efforts of the employees of Tata Steel UK along with all stakeholders, we will work to transform Tata Steel UK into a green, modern future ready business,” said TV Narendran, Tata Steel’s Chief Executive Officer and Managing Director in an exchange filing. 

Also Read: Tata Steel signs 500 million pound-deal with UK govt for Port Talbot steel plant; 3,000 jobs potentially at risk

Brokerage views

Nuvama Institutional Equities

In its analysis, domestic brokerage Nuvama Institutional Equities stated that with an expected internal rate of return (IRR) of 15% or higher, UK businesses has a bright future. The brokerage has a ‘buy’ rating for Tata Steel stock with a 12-month target price of ₹142.

The brokerage also stated that Tata Steel decided against closing its 3 mtpa steel facility in the UK in favour of decarbonizing it. This will require capex of GBP1.25 billion (GBP500 million from the UK government) over the following four years. Tata will restructure its costs (and incur one-time restructuring charges in H2FY24) in the meantime, which will help it reduce its losses during the transition period to almost break even.

“We believe a dip in earning losses, and lower maintenance cost and working capital shall be offset by capex involved in transition. The net additional cost should be one-time restructuring charges (we reckon < USD400mn). The future looks promising for UK operations with an estimated IRR of 15%-plus; reiterate ‘BUY’.

We believe value accretion due to lower losses at the UK operation FY25 onwards will be offset by the capex involved in the transition. We shall revise our numbers during Q2 once there is clarity on restructuring charges. Indian operations continue to do well and drive the stock. A stock dip, if any, shall be a buying opportunity,” explained Nuvama in its report. 

Axis Securities

Brokerage Axis Securities has revised Tata Steel stock price’s rating to ‘buy’ from ‘hold’. The brokerage arrives at a one-year forward target price of ₹145 from ₹125, and sees an potential upside of 10% from the current market price of ₹132.

“In the short to medium term, we expect the company will not be able to meet its deleveraging target of $1bn per annum as capital support from Indian operations will be needed at TSE. Capex at Tata Steel UK and further development at Tata Steel Netherlands for green steel transition will keep the free cash flow under pressure. On the flip side, the 5mtpa TSK phase II will be accretive in both value and volume terms from FY26 onwards. We don’t see much downside to stock price despite the European operations putting pressure on the cash flows as Indian operations grow in size in the next few years,” added Axis Securities in its report.

“While progress towards resolving the UK facility, which is nearing the end of its useful life, is encouraging, we await more clarity on financials, write-offs and other operational details. We anticipate the release of these information in the upcoming months, particularly after the 2Q FY24 results.

The stock is currently trading at 6.3x FY25E EV/EBITDA and 1.4x FY25E P/B. We have kept our estimates unchanged and reiterate our Neutral stance on the stock with an SoTP-based target price of ₹120 (unchanged), sees 9% downside for the stock from the CMP of ₹132,” the brokerage said in its report. 

Updated: 18 Sep 2023, 11:19 AM IST