Mumbai: Tata Steel’s stabilising debt profile has prompted analysts to increase their target price and upgrade profit estimates after the fourth-quarter earnings. The stock, analysts believe, could give returns of up to 60 per cent in the next one year with continued reduction in debt from internal accruals and divestment of noncore businesses.
The March quarter consolidated EBITDA increased 12 per cent QoQ and 16 per cent YoY to Rs 7,510 crore, surpassing consensus estimates, mainly driven by heavy destocking across the group and higher margins in Europe. Margins, however, contracted in India. The company repaid Rs 10,100 crore of debt in the quarter.
The stock, which rallied 10 per cent so far this year, ended 6.67 per cent higher at Rs 545 on Friday. Currently, Tata SteelNSE 6.75 % is trading at 6.31 times its trailing 12 months earnings, cheaper compared with peers such as JSW Steel and SAIL.
Due to the combined impact of EBITDA upgrades and lowerthan-expected debt, several analysts have increased their price target.
“Tata Steel remains our preferred play on the steel cycle, given the stabilising debt profile and impending Tata Steel Europe-Thyssen JV,” said Ashutosh Somani, analyst, JM Financial.
According to the management, the company’s net debt is expected to come down by another Rs 2,300 crore with divestment of SEA operations. However, debt taken to buy Usha Martin’s steel business could offset the impact of the reduction in net debt through divestments.
Tata Steel incurred capex of Rs 9,090 crore in FY19 and has guided for an FY20 outlay of Rs 8,000 crore, with the primary expenditure on the KPO-II project. It approved the merger of Tata Steel BSL with Tata Steel. Tata Steel BSL, along with Usha Martin, is expected to deliver an additional 1MT of steel volumes in FY20.
Investec raised its target price from Rs 750 to Rs 800, and JM Financial from Rs 683 to Rs 715. Motilal Oswal Securities has raised the target price by 45 per cent to Rs 533 whereas IIFL has raised it to Rs 621 from Rs 618. JPMorgan and Credit Suisse maintained their targets at Rs 880 and Rs 628, respectively.
“Going ahead, we see value enablers for the stock, such as restructuring of European operations, cash accretion of $327 million from part divestment of southeast Asian operations and enhanced focus on profitable domestic operations,” said Amit Dixit, analyst, Edelweiss Securities. “We believe domestic operations are better placed compared with peers to tide over the current subdued operating environment.”