Tata Steel Ltd – Investment Ideas | Globe Capital Market LTD.

Tata Steel, with its geographically diversified presence, touches millions of lives every day. It is one of the handful of steel players that is fully integrated – from mining to manufacturing to marketing of finished products. It is continuously working towards scaling new heights and reinforcing its leadership in the global steel industry. The Company has 34 MnTPA Annual crude steel production capacity globally. Tata Steel is the 10th largest steel producer in the world.

Diversified Manufacturing Base: The Company is one of the world’s most geographically diversified steel producers. Together with its subsidiaries, associates and joint ventures, its operations are spread across five continents with an employee base of over 65,000. Its steel manufacturing and downstream facilities are in India, the UK, the Netherlands and Thailand, while its raw material mines are in India and Canada.

Raw material assets: Tata Steel sources most of the required raw materials from its captive mines in India, providing raw material security and the competitive advantage of being a low-cost steel producer. The Raw Material Division of Tata Steel supplies almost 100% of iron ore and nearly 21% of clean coal requirements for steel manufacturing facilities in India, while the rest is imported.

Diversified product portfolio to meet diverse need: The Company caters to various sectors like Automotive, Construction, Industrial & General Engineering and Agriculture.

Strong Financial Growth: It’s consolidated revenue surged 56% to Rs. 2,43,959 crore and profit after tax increased 410% to Rs. 41,749 crore. During the financial year, the Company achieved the highest ever consolidated EBITDA of ₹63,830 crore, a growth of 107%, translating into an EBITDA per tonne of ₹21,626 and a healthy EBITDA margin of 26%. The Company generated free cash flow of ₹27,185 crore and reduced its net debt by 32% to ₹51,049 crore in FY 2021-22.

On the back of this performance, the Company has recommended a dividend of ₹51/- per fully paid up equity share and ₹12.75 per partly paid-up equity share of the Company, which translates to a highest ever dividend payout of 510% per share. The Board of Directors has also recommended a sub-division of the equity shares in the ratio of 10:1. The Company has fixed Ex-Date for stock split on July 28, 2022.

Re-shaping the balance sheet – The management had publicly stated that the Company will de-lever at least one billion dollars per annum and post the acquisition of Bhushan Steel and the Usha Martin Steel Business, it prioritised the de-leveraging ahead of capital allocation on capex and growth. It was a very critical strategic agenda for the Company and in the last two years, it has reduced its net debt by over Rs. 50,000 crore. Its free cash flow was Rs. 27,185 crore in FY 2021-22 (Rs. 23,748 crore in FY 2020-21) after taking into account the increase in working capital by Rs. 9,618 crore due to significant increase in the value of both raw material and finished products. The Company was able to achieve its deleveraging target of US$1 bn within the first six months and prepaid nearly Rs.15,000 crore of debt during the year. The Company reduced its consolidated net debt from Rs. 75,389 crore at the start of the year to Rs. 51,049 crore as at March 2022.

Attractive growth potential – The Indian economy is likely to become the third largest economy by 2030, and the steel industry will play a pivotal role in this growth journey. India’s per capita steel consumption is only one-third of the world average. Increasing population, rapid urbanisation, mobility and infrastructure requirements and government initiatives such as ‘Make in India’ are expected to boost steel demand growth.

Valuation & View: The country’s low per capita steel consumption versus global average provides significant headroom for growth. At the CMP of Rs 902, the stock is trading at P/E multiple of 2.75 times which lower than 5 years averages. Hence, we recommend a ‘BUY’ rating for the target price of Rs. 1350 in 12 months perspective.

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