Tata Steel: TSUK resolution removes a key overhang

18 Sep 2023 , 11:03 AM

Recommendation: Add; Target Price: Rs 143

 

The finalisation of GBP500mn grant from the UK govt for a GBP1.25bn 3mtpa EAF facility at TSUK, removes a key overhang for Tata Steel. This is because cash support from India operations (GBP163mn in FY23) fades incrementally, during the transition. Timelines for the transition, quantum of the impairment of investments/PPE and the possible cash outflow for employee base reduction should be known in ~90 days, as the consultation with unions is finalised. Capex (funded through internal cash) is expected to be completed over 3yrs, post the receipt of all approvals. During this time, the company will resort to substrate imports to maintain the continuity of supplies for customers. Analysts of IIFL Capital Services retain ADD. 

Secures 40% grant for transition to 3mtpa EAF facility at TSUK: Tata Steel has announced a joint agreement with the UK govt to invest GBP1.25bn for a 3mtpa EAF facility. Over the next 3.5-4yrs, capex will include a GBP500mn (40% of capex vs ask of 50%) grant from the govt. There will be no further govt support for opex; but mgmt expects a competitive grid-based power cost backed by the supercharger scheme and rapid shift to renewable capacity the UK. Mgmt expects GBP150-170/t total cost saving vs the existing BF operations, led by ~GBP50/t saving on carbon costs (intensity at 0.4 tCO2/t for EAF vs 2.05 tCO2/t for BF). Overall, mgmt expects project IRR of ~15% over the life of asset. 

Next focus on consultation process for the transition: Next steps include a 60-90 day consultation process to finalise the contours of the transition; especially around reduction in employee base. This will lower cash support from the parent (~GBP163mn in FY23) based on pace of transition/closure. In order to maintain supplies to the strong customer base, the company will resort to imports of substrate for processing at the downstream facilities till the EAF facilities are commissioned. Details on restructuring-led impairments awaited: Closure/restructuring of the existing BF facilities will involve non-cash impairment of the legacy investments/PPE as well as the possible cash outflow towards reduction of employee base (8,320 in FY23). As per FY23 balance sheet, non-current assets in UK stood at ~GBP1bn, including both upstream and downstream asset base.