Tata Steel shares recover, up 9% in 1 month; Motilal Oswal sees limited upside potential

Shares of Tata Steel have recovered 9 per cent in the last one month, cutting its year-to-date losses to 4 per cent. But if one goes by Motilal Oswal Securities’ price target, the stock might have run out of steam. Motilal Oswal said its analysis of Tata Steel's FY23 annual report showed that despite an adverse macro-economic environment and geopolitical volatility, the domestic growth story remained resilient for the company.

"Domestic steel prices, which move in tandem with international steel prices, have corrected over the last few weeks; however, steel demand is expected to improve before the onset of the monsoon season. The UK operation continues to be a drag, with its assets nearing the end of useful lives, and would keep the group performance in check. Tata Steel relies heavily (75-78 per cent) on domestic merchants or imports for its coal requirements and any sharp increase in its prices could adversely impact its margins," Motilal Oswal Securities said.

Tata Steel is currently trading at 5.8 times FY24E EV/Ebitda, the brokerage said while retaining its 'Neutral' rating on the stock with a target of Rs 110. The scrip closed at Rs 114.30 on Tuesday.

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Steel Power house

Motilal Oswal said the ongoing amalgamation process of seven of its subsidiaries and one associate company into Tata Steel is expected to be concluded by the end of FY24. Tata Steel is merging four of its listed entities, namely Tata Steel Long Products, Tinplate Company of India, Tata Metaliks and TRF in the swap ratio of 6.7, 3.3, 7.9 and 1.7 for every 1 share of Tata Steel, respectively.

"The amalgamation will enable Tata Steel to achieve higher synergies, drive significant cost savings, undertake focused growth capex, increase market presence across product lines, and consolidate market share under a single unified brand.  The amalgamated entity will also incur lower royalty payments and increase liquidity for the existing shareholders," it said.

Robust domestic demand, UK a drag

Indian steel demand is expected to remain robust and grow 6.2 per cent in FY24 on the back of higher private sector consumption, the government’s thrust on infrastructure, new launches in the automobile sector, higher investments in renewable energy and higher demand for white goods.

"Steel demand in India is expected to mimic the GDP growth rate, driven by higher budgetary outlay toward infrastructure and higher private sector consumption," Motilal Oswal Securities said adding that steel demand is expected to remain robust across key sectors, such as construction, infrastructure, automobiles, railways and white goods.

Tata Steel, it said,  remains buoyant about domestic steel demand over the next decade and is expected to almost double its domestic capacity to 40 mt from 21 mt.

"The capacity expansion will help Tata Steel navigate steel cycles, capitalise multiple opportunities and simultaneously deleverage its balance sheet. TATA expects to resume its deleveraging exercise and targets to reduce its debt by $1 billion in FY24," Motilal Oswal Securities said.

That said, Motilal Oswal Securities said that Tata STeel has a strong presence in the UK, but its operations have been a drag, with dispatches declining by 0.47 mt to 3.02 mt in FY23. The FY23 performance was affected by lower market demand, higher interest rates and geopolitical volatility, it said.

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