'Contingent liability overhang looms': Tata Steel stock falls for 2nd day. What's ahead?

Shares of Tata Steel Ltd fell over 5 per cent in Friday's trade, in addition to a 1.4 per cent drop in the previous session, amid concerns over a Rs 17,300 crore contingent liability, even as analysts are largely neutral-to-positive on the Tata group stock.   

Recently, the Supreme Court ruled in favor of the state governments’ authority to levy taxes on mineral rights. Tata Steel is currently engaged in a legal battel with Odisha over its law, which gives it the power to levy taxes on mineral-bearing land with effect from February 1, 2005, Elara Securities said.

Tata Steel has disclosed an accumulated contingent liability of about Rs 17,300 crore related to the matter. Saying that this contingent liability overhang looms, Elara said the court has yet to clarify whether the ruling will be applied retroactively. 

"We believe if the ruling is applied retroactively, it would be a setback for Tata Steel, as the amount equates to Rs 14 per share, or 8 per cent, of its market capitalisation," it said.

Post Tata Steel's strong Q1 results, Elara raised its target price of Rs 171 on the stock from Rs 157 earlier.On Friday, the stock fell 5.18 per cent to hit a low of Rs 154.60 on BSE. The scrip fell 1.37 per cent in the previous trading session.

"The matter (contingent liabilities) will be an overhang until a limitation -- which can cap the tax levy from the state governments, is brought in by an amendment in the MMDR act by the central government in future," Axis Securities said today.

This brokerage has a target of Rs 175 on Tata Steel.

According to the Tata Steel management, the Supreme Court judgment settles a question of law, namely the power of states to impose tax. 

"However, this power may be capped by certain limitations passed by the Parliament. Operative parts of the law, including the time period for calculation of dues, need further clarity," Kotak Institutional Equities said. This brokerage has a fair value of Rs 150 on the stock.

As far as Tata Steel prospects are concerned, YES Securities said the Tata group firm is rightly positioned in the Indian steel space, growing strongly with upcoming capacities coupled with the expected relief on the European front. 

"The company is on the path to decarbonize its European operations starting with TSUK which shall be seeing the complete closure of the heave-end assets by the end of Q2FY25, followed by discussions with the Netherlands’ government on a possible DRI-BF transition," it said.

This brokerage values Tata Steel at an unchanged target price of Rs 169 per share. 

Tata Steel reported a 51 per cent YoY rise in consolidated net profit for the June quarter. Net profit climbed to Rs 960 crore in Q1 against a net profit of Rs 634 crore in the year-ago period. Revenue from operations fell 8 per cent to Rs 54,771 crore from Rs 59,490 crore YoY. Ebitda for the quarter was up 11.4% per cent at Rs 6,822 crore.