Tata Steel: Focus on sustaining all-round leadership

21 Jun 2023 , 10:47 AM

Recommendation: Add; Target price: Rs 130

Tata Steel’s FY23 annual report (AR) reiterates the target of doubling India capacity to 40mtpa by 2030 while sustaining cost leadership through multiple initiatives. R&D remains in focus to drive efficiencies, new higher value-added products and adjacent products. The company has laid out detailed path to meet net-zero targets in India and Europe, and has seen progress as well. Deleveraging should resume from FY24, primarily aided by Indian cash flows.

Targeting to double capacity while sustaining cost leadership: 

AR23 highlights the commitment to double capacity to 40mt by 2030, including 5mtpa TSK-II commissioning by FY24. Profitability will be boosted by recently commissioned 6mtpa pellet plant and 2.2mt CRM complex at TSK. Cost focus is evident in: (i) Gains from operational costs under Shikhar25. (ii) Structural measures such as augmentation of RM portfolio and logistics (iii) Simplification of structure through ongoing merger of subsidiaries with the parent. 

NPD, adjacent businesses and sustainability are in focus: 

AR23 highlights focus on R&D to develop new products and processes. The company is also targeting developing adjacent businesses including Services & Solutions, New Materials (graphene, composites and medical materials) and Commercial Mining. The company has seen improvements in most sustainability parameters and launched a low-carbon product in Europe. AR23 details the path to achieve net-zero target through higher scrap usage, shift to gas/hydrogen-based DRI and CCUS, among other measures.

TSE centred on sustainable profit; consol. deleveraging to continue: 

Even as the discussion for govt support for sustaining operations at TSUK continues, TSE is focused on its “sustainable profit program” through higher yields, better product mix and lower costs. In terms of debt, AR23 reiterates the annual US$1bn deleveraging target post Rs160bn capex plan. India business profitability holds the key; analysts of IIFL Capital Services estimate that net debt should continue to fall from Rs680bn in FY23 to Rs426bn by FY26. Minimal incremental WC requirements amid softer coal prices will help as well.