Tata Steel is currently in a sweet spot & has a BUY recommendation: ICICI Direct

Targeting 40 MT production capacity in India by 2030

Recently, in its Investor Day, Tata Steel (TSL) laid out its strategic Roadmap 2030. TSL is aiming to double Indian operations steel production capacity to 40 million tonnes (MT) by 2030. The doubling of domestic production capacity would be done through both organic as well as inorganic route. The company would focus on organic growth for the flat product segment and would participate in inorganic opportunities for the long product segment. In terms of product-wise break-up, by 2030 the target is to increase the production capacity of flat product portfolio to 30 MT (from 15.6 MT currently) and increase the production capacity of long product portfolio to 10 MT (from 4 MT currently). India would be the dominant manufacturing base for TSL, going forward. India’s share in the company’s overall consolidated production capacity has increased to 57% in 2020 from 29% in 2010. The country’s share is further likely to increase to 73% by 2030.

Targets net debt/EBITDA at 2x across cycles….

TSL is aiming at net debt/EBITDA at 2x across cycles wherein 2x would be the upper limit. For FY22E, net debt/EBITDA is likely to be lower than 2x, given buoyancy in earnings due to higher steel prices. In FY22E, the company is targeting an annual capex of ~| 10000-12000 crore for the India operations (majority of which would be growth capex) and ~| 3500 crore for the European operations (majority of which would be maintenance capex). The interest coverage ratio target is at 4x, across cycles.

Debt reduction drive to continue….

TSL’s debt reduction drive would continue, going forward, also, auguring well. During FY21, the net debt reduction was to the tune of ~US$4 billion. For FY22E, TSL is targeting over US$2 billion gross debt reduction wherein it will prioritise offshore debt prepayment. In FY22E, the company expects to drive working capital management in the upcycle.

Valuation & Outlook

TSL is currently in a sweet spot on the back of a) relatively healthy steel prices both in the global and domestic markets and b) balance sheet improvement on the back of the debt repayment exercise that it is undertaking. On the back of a healthy operating environment, we remain positive on the stock. TSL’s targeted RoIC is 15% across cycles. Furthermore, the carbon adjusted project IRR threshold for capital allocation is 12%. We continue to value the stock on an SoTP basis and arrive at an unchanged target price of Rs 1500. We maintain our BUY recommendation on the stock.