Tata Steel (TATSTE)

CMP: | 101 Target: | 110 (9%) Target Period: 12 months HOLD

November 2, 2022

Debt increases sharply QoQ due to NINL payout….

About the stock: Tata Steel Group is among the top global steel companies with

Result Update
an annual steel production capacity of ~34 million tonnes per annum (MTPA).

 Tata Steel (TSL) is one of the world’s most geographically diversified steel Particulars
producers, with operations and commercial presence across the world Particular Amount
 TSL has been a part of the DJSI Emerging Markets Index since 2012 and has Market Capitalization (| Crore) 1,23,583
Total Debt (Q2FY23) (| Crore) 87,516
been consistently ranked among top 10 steel companies in the DJSI
Cash & Cash Eq. (Q2FY23) (|
Corporate Sustainability Assessment since 2016 15,763
Crore)
EV (| Crore) 1,95,336
Q2FY23 Results: Tata Steel reported a steady operational performance in Q2FY23. 52 week H/L (|) 139 / 83
 For Q2FY23, Tata Steel’s consolidated operations reported a topline of Equity capital | 1221 Cr.
| 59878 crore, down 1% YoY, 6% QoQ (our estimate of | 59697 crore) Face value | 1
Shareholding Pattern
 Consolidated reported EBITDA for the quarter was at | 6060 crore against
(in % ) Dec-21 Mar-22 Jun-22 Sep-22
our estimate of | 6465 crore. For consolidated operations, effective tax rate
Promoter 33.9 33.9 33.9 33.9
during Q2FY23 was at 50%, notably higher than our estimate of 25%. FIIs 21.4 22.9 22.0 21.5
Hence, on the back of higher-than-expected effective tax rate, reported PAT DIIs 18.1 20.4 19.0 18.2
came in lower than our estimate. Consolidated reported PAT for Q2FY23 Public 26.6 22.8 25.1 26.4
was at | 1297 crore (our estimate of | 2350 crore) Total 100.0 100.0 100.0 100.0

ICICI Securities – Retail Equity Research

 On the balance-sheet front, Tata Steel’s consolidated net debt increased Price Chart
sequentially by ~ | 17249 crore and was at | 71753 crore as on September
30, 2022. The increase in net debt was on account of bunching of large
payouts during Q2FY23, which included NINL acquisition, FY22 dividend
payout and growth capex

What should investors do? Tata Steel’s share price has given a return of ~153%
in the last three years (from ~| 40 in November 2019 to ~| 101 in November 2022).

 On the back of significant increase in consolidated net debt levels

sequentially coupled with an expected decline in EBITDA/tonne of Tata Steel
European operations during H2FY23E (when compared with H1FY23), we
downgrade the stock from BUY to HOLD
Target Price and Valuation: We value TSL at | 110, based on SoTP valuation. Key Risks
Key triggers for future price performance:  Key risks: (i) Steep decline in steel
prices (ii) Lower than expected
 Going forward, for the Tata Steel Standalone operations, we model increase in operating costs
EBITDA/tonne of | 14000/tonne for FY23E and | 16000/tonne for FY24E Research Analyst
 Going forward, for the Tata Steel European operations, we model Dewang Sanghavi
EBITDA/tonne of US$140/tonne for FY23E and US$120/tonne for FY24E dewang.sanghavi@icicisecurities.com

Alternate Stock Idea: In our metals and mining coverage, we like Coal India.
 Coal India (CIL) is one of the largest coal producers in the world. In FY22,
CIL produced 623 million tonnes (MT) while offtake was at 622 MT
 BUY with a target price of | 275

Key Financial Summary

(| Crore) FY19 FY20 FY21 FY22 CAGR (FY17-22) FY23E FY24E CAGR (FY22-24E)
Net Sales 1,57,669 1,39,817 1,56,294 2,43,959 17% 2,40,500 2,42,183 0%
Reported EBITDA 29,383 17,463 30,504 63,490 30% 37,280 40,430 -15%
PAT 8,995 4,737 9,233 41,749 LP 16,174 17,063 -23%
EPS (|) 7.9 4.1 7.7 34.3 13.5 14.3
EV/EBITDA (x) 7.0 12.9 6.9 3.0 5.4 4.9
RoCE (%) 13.8 4.8 13.1 28.5 12.7 13.3
RoE (%) 13.0 6.4 12.4 36.4 12.9 12.3
Source: Company, ICICI Direct Research
 Result Update | Tata Steel ICICI Direct Research

Key Highlights on conference call and other highlights…

Indian Operations
 For Q3FY23, with respect to the Indian operations, realisations are expected
to decline by ~| 800/tonne QoQ, compared to Q2FY23

 For Q3FY23, with respect to the Indian operations coking coal consumption
cost is expected to decline by ~US$80/tonne QoQ, when compared with
Q2FY23. Hence, for Indian operations, EBITDA/tonne is likely to improve on
a QoQ basis primarily aided by lower coking coal costs

 The 6 million tonnes per annum (MTPA) pellet plant will be commissioned
in Q3FY23 and will be followed by the cold roll mill complex in phases. The
5 MTPA expansion at Kalinganagar is on track to be commissioned by the
end of FY24

 Neelachal Ispat Nigam’s blast furnace was restarted in October 2022, within
three months of completion of the acquisition and is being ramped up

 Work has commenced on setting up 0.75 MTPA electric arc furnace (EAF)
in Punjab, which will leverage the growth in the construction segment and
is an important milestone in transition to net zero
European Operations
 For Q3FY23, with respect to European operations, coking coal consumption
cost is expected to decline by ~US$100/tonne QoQ compared to Q2FY23.
For European operations, during Q3FY23, iron ore costs are expected to
decline by ~US$15/tonne compared to Q2FY23

 For Tata Steel Netherlands operations, all the earlier tax losses have been
absorbed. Going forward, Tata Steel Netherlands operations will be taxed
at 25%
Others
 Net debt as on September 30, 2022 was at | 71753 crore. Net debt to EBITDA
as on September 30, 2022 was at 1.37x and net debt to equity was at 0.63x

 For Q2FY23, Tata Steel incurred a capex to the tune of | 3198 crore

 As per relevant standards, the BSPS pension scheme has a surplus of £1.49
billion

ICICI Securities | Retail Research 2

 Result Update | Tata Steel ICICI Direct Research

Exhibit 1: Variance Analysis (Consolidated Performance)

z

Q2FY23 Q2FY23E Q2FY22 YoY (%) Q1FY23 QoQ (%) C omments

Consolidated topline came in broadly
Rev enue 59878 59697 60387 -1% 63430 -6%
in line with our estimate
Total Expenditure 53817 53232 43931 23% 48457 11%
Reported EBITDA 6060 6465 16456 -63% 14973 -60%
Reported EBITDA M a rgin
10.1 10.8 27.3 (1720) bps 23.6 (1350) bps
(%)
Depreciation 2348 2350 2289 3% 2237 5%
Finance cost 1519 1250 1020 49% 1218 25%
Other Income 329 275 271 22% 268 23%
Share of Profit from associate 102 0 185 -45% 160 -36%
Exceptional Items -19 0 516 PL -39 -50%
PBT 2605 3140 14120 -82% 11906 -78%
Consolidated tax expenses came in
Tax Outgo 1308 790 1572 -17% 4192 -69%
higher than our estimate
On the back of higher than expected
Reported PAT 1297 2350 12548 -90% 7714 -83% tax expenses, consolidated PAT
came in lower than our estimate
Key M etrics
Tata Steel (Standalone Tata Steel (standlaone operations)
operations) sales volumes (in 4.8 4.8 4.4 8% 3.9 22% sales volume came in line with our
MT) estimate
Tata Steel European operations sales
Tata Steel European operations
1.9 1.9 2.1 -11% 2.1 -13% volume came in line with our
sales volume (in MT)
estimate
Tata Steel (Standalone operation) Tata Steel (standalone operations)
reported EBITDA/tonne (in 10177 10000 30385 -67% 21326 -52% EBITDA/tonne came in broadly in line
|/tonne) with our estimate
Tata Steel European operations Tata Steel European operations
reported EBITDA/tonne (in 120 100 211 -43% 365 -67% EBITDA/tonne came in higher than our
US$/tonne) estimate
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 3

 Result Update | Tata Steel ICICI Direct Research

Financial story in charts

Exhibit 2: Tata Steel European operations EBITDA/tonne… (in US$/tonne)
For Tata Steel European operations, we model
200 180
EBITDA/tonne of US$140/tonne for FY23E and US$
120/tonne for FY24E
150 140
120
in US$/tonne

100

50

0
FY20 FY21 FY22 FY23E FY24E
-10 -12
-50

Source: Company, ICICI Direct Research

Exhibit 3: Standalone operation EBITDA… (in |/tonne)

30000 27986
For Tata Steel standalone operations, we model
25000 EBITDA/tonne of | 14000/tonne for FY23E and
| 16000/tonne for FY24E
20000 17613
16000
14000
15000
11000
10000

5000

0
FY20 FY21 FY22 FY23E FY24E
Source: Company, ICICI Direct Research

Exhibit 4: Consolidated EBITDA margins trend….(in %)

28.0 26.0 For the next couple of years, we expect consolidated
EBITDA margin at ~15.5% for FY23E and ~16.7%
24.0 for FY24E
19.5
20.0
16.7
15.5
16.0
12.5
(in %)

12.0

8.0

4.0

0.0
FY20 FY21 FY22 FY23E FY24E
Source: Company, ICICI Direct Research

Exhibit 5: Valuation Matrix

Total Op.
Growth EPS Growth PE EV/EBIDTA P/ BV RoNW RoCE
Income
(| Crore) % YoY (|) % YoY (x) (x) (x) (%) (%)
FY21 1,56,294 11.8 7.7 86.4 13.1 6.9 1.6 12.4 13.1
FY22 2,43,959 56.1 34.3 344.9 2.9 3.0 1.1 36.4 28.5
FY23E 2,40,500 (1.4) 13.5 (60.6) 7.5 5.4 1.0 12.9 12.7
\
FY24E 2,42,183 0.7 14.3 5.4 7.1 4.9 0.9 12.3 13.3
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Result Update | Tata Steel ICICI Direct Research

Exhibit 6: SoTP Valuation

Particulars Units Mar-24E
Tata Steel Standalone Operations
Tata Steel Standalone operations Sales volume (FY24E) in MT 18.8
Tata Steel Standalone operations EBITDA/tonne (FY24E) |/tonne 16,000
Tata Steel Standalone operations EBITDA (FY24E) | crore 30,080
Multiple x 5.5
Tata Steel Standalone operations Target EV (A) | crore 165440

Tata Steel European Operations

Tata Steel European operations Sales volume (FY24E) in MT 9
Tata Steel European operations EBITDA/tonne (FY24E) |/tonne 9600
Tata Steel European operations EBITDA (FY24E) | crore 8,640
Multiple x 3.0
Tata Steel European operations Target EV (B) | crore 25920

Tata Steel Other Subsidiaries EBITDA (FY24E) | crore 1710

Multiple x 4.0
Tata Steel Other Subsidiaries Target EV (C) | crore 6840

Total Consolidated Target EV (A+B+C) | crore 198200

Gross Debt (FY24E) | crore 84061
Net Cash and Cash Equivalents (FY24E) | crore 19898
Net Debt (FY24E) | crore 64163
Equity value | crore 134037
No. of Equity Shares in crore 1221
Target price of Tata Steel in |/share 110
CMP of Tata Steel in |/share 101
Upside (% ) in % 9%
\

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5

 Result Update | Tata Steel ICICI Direct Research

Financial summary (Consolidated)

Exhibit 7:Profit and loss statement | crore Exhibit 8: Cash flow statement |crore
(Year-end March) FY21 FY22 FY23E FY24E (Year-end March) FY21 FY22 FY23E FY24E
Total Operating Inc. 156294 243959 240500 242183 Profit after Tax 8190 41749 16519 17417
Growth (%) 12 56 -1 1 Add: Depreciation 9234 9101 9782 10344
Total Operating Expend. 125790 180469 203220 201752 (Inc)/dec in Current Assets 5843 -23575 -10808 3390
EBITDA 30504 63490 37280 40430 Inc/(dec) in CL and Prov. 18900 9302 -4967 -9557
Growth (%) 75 108 -41 8 Others -12821 7804 3370 3254
Depreciation 9234 9101 9782 10344 CF from operating activities 29345 44381 13896 24848
Interest 7607 5462 6025 6323 (Inc)/dec in Investments -4397 -3668 -50 -50
Other Income 896 785 852 849 (Inc)/dec in Fixed Assets -7023 -10522 -24100 -16000
PBT 14560 49712 22325 24613 Others 683 -13132 -337 -396
Share of Profit from JV/Assoc. 0 649 682 750 CF from investing activities -10737 -27321 -24487 -16446
Exceptional Item -1043 -134 0 0 Issue/(Buy back) of Equity -1447 24 0 0
Total Tax 5654 8478 6832 8299 Inc/(dec) in loan funds -24789 -12940 13500 -5000
PAT 7862 41749 16174 17063 Dividend paid & dividend tax -2994 -6228 -3663 -3663
Growth (%) 236 431 -61 5 Inc/(dec) in Share Cap 0 0 0 0
Minorities, Associates, etc 327 0 345 353
Others 8349 12201 682 750
Rep PAT after Assoc. MI 8190 41749 16519 17417
CF from financing activities -20880 -6943 10518 -7913
Adj PAT after Assoc. MI 9233 41883 16519 17417
Net Cash flow -2273 10116 -73 488
Growth (%) 94.9 353.6 -60.6 5.4
Opening Cash 8055 5782 15899 15826
EPS (|) 7.7 34.3 13.5 14.3
Closing Cash 5782 15899 15826 16314
Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

Exhibit 9:Balance sheet | crore Exhibit 10: Key ratios | crore

(Year-end March) FY21 FY22 FY23E FY24E (Year-end March) FY21 FY22 FY23E FY24E
Liabilities Per share data (|)
Equity Share Capital 1198 1221 1221 1221 Adj EPS 7.7 34.3 13.5 14.3
Hybrid Perpetual securities 775 775 775 775 Cash EPS 15.4 41.8 21.5 22.7
Reserve and Surplus 72266 113222 126077 139831 BV 62.0 94.4 104.9 116.1
Total Shareholders funds 74239 115218 128074 141827 DPS 2.5 5.1 3.0 3.0
Total Debt 88501 75561 89061 84061 Operating Ratios (% )
Deferred Tax Liability 9241 12326 12696 12949 EBITDA Margin 19.5 26.0 15.5 16.7
Minority Interest & Others 18731 17628 20973 24327 PBT / Total Operating income 9.3 20.4 9.3 10.2
Total Liabilities 190712 220733 250803 263164 Adj PAT Margin 5.9 17.2 6.9 7.2
Assets Inventory days 83 115 120 130
Gross Block 262887 269440 289540 301540 Debtor days 30 30 30 30
Less: Impairment 0 0 0 0 Creditor days 145 150 145 135
Less: Acc Depreciation 126233 135334 145116 155460 Return Ratios (% )
Net Block 136654 134106 144424 146080
Adj RoE 12.4 36.4 12.9 12.3
CWIP 18129 21228 25228 29228
Adj RoCE 13.1 28.5 12.7 13.3
Net Fixed Assets (Incl. CWIP) 154783 155333 169651 175308
Adj RoIC 13.6 31.1 13.7 14.4
Investments 10682 14350 14400 14450
Valuation Ratios (x )
Inventory 33276 48824 50506 49546
P/E 13.1 2.9 7.5 7.1
Debtors 9540 12246 13972 14042
EV / EBITDA 6.9 3.0 5.4 4.9
Loans and Advances 29692 33550 40550 37550
EV / Net Sales 1.6 0.8 1.0 0.9
Other Current Assets 2410 3872 4272 4772
Market Cap / Sales 0.9 0.5 0.6 0.6
Cash 5782 15899 15826 16314
Price to Book Value 1.6 1.1 1.0 0.9
Total Current Assets 80701 114392 125127 122225
Solvency Ratios
Current Liabilities 56651 65852 61134 51828
Debt/EBITDA 2.7 0.8 1.7 1.5
Provisions 4725 4826 4576 4326
Current Liabilities & Prov 61376 70678 65710 56154 Debt / Equity 1.1 0.5 0.6 0.5
Net Current Assets 19325 43715 59417 66072 Current Ratio 1.3 1.6 1.9 2.2
others 5923 7335 7335 7335 Quick Ratio 0.8 0.9 1.1 1.3
Application of Funds 190712 220733 250803 263164 Source: Company, ICICI Direct Research

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6

 Result Update | Tata Steel ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities | Retail Research 7

 Result Update | Tata Steel ICICI Direct Research

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ICICI Securities | Retail Research 8