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MOSL: TATA STEEL (Neutral) - ANNUAL REPORT UPDATE: Focus back on growth but with an eye on leverage

(TATA IN, Mkt Cap USD17.8b, CMP INR1100, TP INR1210, 10% Upside, Neutral)

 

Tata Steel (TATA)’s FY21 Annual Report highlights the ambition of the company to maintain leadership in volumes, cost, and sustainability. With improved cash flows, the focus is back on growing the India business, wherein it aims to double capacity to 35–40mt by 2030. However, it plans to tread cautiously on this path as debt repayment remains the focal point for the management. On Tata Steel Europe (TSE), the management palpably appears concerned about the tightening emission norms in Europe, rising carbon credit costs, and the resulting lower competitiveness against imports to Europe, which pose a key challenge in the longer term. While we expect deleveraging to continue on the back of higher prices, rising carbon costs and the burden of sustainability capex in TSE are key concerns, in our view. Thus, we assign a Neutral rating, with TP of INR1,210.

 Refocusing on growth, but deleveraging remains core focus

• After some muted years, FY21 has ushered in an unexpected bonanza on pricing-led EBITDA growth for TATA, fueling growth ambitions. It now wants to double its steelmaking capacity in India to 35-40mt by 2030, from 19.6mt currently. The resumption of the 5mt expansion at Kalinganagar (KPO-II) is the first step in this direction, with likely completion by FY24-end. KPO-II would involve capex of INR235b (including a 2.2mtpa CRM and pellet plant), of which ~INR75b has already been spent.
• TATA, however, plans to tread cautiously on the growth path as debt repayment remains the focal point for the management. While consolidated net debt declined sharply by INR245b in FY21 (supported by a strong working capital release of INR165b), it remained high at INR826b (2.7x of FY21 EBITDA).
• With the earnings outlook remaining strong, we expect net debt to decline further to INR621b by Mar'22 (1.1x of FY22 EBITDA), which should create an appetite for further growth plans. TATA has a long-term target of maintaining net debt/EBITDA below 2.5x.