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Analysts see long term growth intact for Tata Steel after Q3 tops estimates

Despite near-term challenges such as high imports and lower realisations, the long-term outlook for Tata Steel remains positive, analsyts at Motilal Oswal said

Tata Steel

Tanmay Tiwary New Delhi

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Steel behemoth Tata Steel’s Q3 results for FY25 took many by surprise by topping Street estimates, although the numbers showed a decline compared to both last year and the previous quarter. 
 
The company’s consolidated profit dropped 36.3 per cent year-on-year (Y-o-Y) to Rs 326.6 crore in Q3FY25 from Rs 513.4 crore in Q3FY24. The profit decline was even sharper when compared to the previous quarter, dropping 60.8 per cent from Rs 833.45 crore in Q2FY25.
 
The revenue fell 3 per cent Y-o-Y to Rs 53,648.3 crore, from Rs 55,311 crore a year ago. 
 
Tata Steel's operational performance also showed weakness. Earnings before interest, taxes, depreciation, and amortisation (Ebitda) slipped 5.7 per cent compared to last year, coming in at Rs 5,903.5 crore, down from Rs 6,263.6 crore in Q3FY24. 
 
 
The Ebitda margin remained relatively stable, squeezing just 30 basis points to 11 per cent from 11.3 per cent a year ago.
 
Despite the overall decline, Tata Steel’s results beat expectations, with revenue surpassing the Bloomberg consensus estimate by 3 per cent. Analysts had actually expected a net loss for the quarter, making the results all the more surprising.
 
T V Narendran, chief executive officer & MD said, “The global operating landscape continues to be shaped by geopolitics and continued economic slowdown in key regions. Steel exports from China, which has averaged 9 million tonnes per month in 2024, has dampened steel prices globally including in India. 
 
Furthermore, the Deliveries stood at 5.29 million tonnes and were up 8 per cent Y-o-Y, driven by steady domestic deliveries and strategic presence in exports. “Growth in deliveries in India and focus on operational efficiency have aided our performance on Ebitda improvement,” Narendran said
 
Narendran highlighted that the growth plans in Kalinganagar are on course. The new blast furnace has produced about 0.56 million tonnes during the quarter and is ramping up to rated capacity. 
 
On the bourses, the Tata Steel share settled 1.82 per cent higher at Rs 128.70 per share. In comparison, BSE Sensex closed 0.71 per cent higher at 75,901.41 levels, on January 28, 2025.
 
Given this, most analysts remained optimistic about Tata Steel's long-term prospects.
 
Motilal Oswal noted that Tata Steel's India business showed strong performance, driven by lower costs. They expect domestic demand to improve in Q4 due to rising government spending and construction activity. The company’s management also anticipates further reductions in Ebitda losses from UK operations and expects the ramp-up of capacity in the Netherlands and lower fixed costs to improve the overall Ebitda performance of its European operations.
 
Despite near-term challenges such as high imports and lower realisations, the long-term outlook for Tata Steel remains positive. The India business is expected to maintain strong performance, and improvements in the European business should support overall earnings. 
As a result, Motilal Oswal has slightly reduced its revenue and Ebitda estimates for FY25 and FY26 by 4 per cent and 5 per cent, respectively, and has lowered PAT estimates for FY26 and FY27 by 5 per cent and 10 per cent. Tata Steel is trading at 5.6x FY27E EV/Ebitda and 1.6x FY27E P/B. Analysts maintained a ‘Neutral’ rating with a revised target price of Rs 140 based on an SOTP valuation.
 
Nuvama, after factoring in the Q3 results, noted that excluding the one-off reversal of provisions (~Rs 1,410 crore) from earlier years, Tata Steel’s standalone Ebitda was Rs 6,110 crore, in line with expectations but down 3 per cent Q-o-Q. Ebitda per tonne stood at Rs 11,550, a decrease of Rs 800 Q-o-Q.
  The UK operations saw reduced losses due to lower fixed costs, while the Netherlands operations barely broke even amid a lower spread Q-o-Q. The consolidated Ebitda was Rs 5,900 crore, down 4 per cent Q-o-Q.
 
Looking ahead, analysts expect Q4FY25 to see an increase in Ebitda per tonne by around Rs 1,500 due to higher volumes, lower coal costs, and slightly higher steel prices.
  Considering the Q3 results, Nuvama has raised its FY25 Ebitda estimate by 7 per cent, but reduced its FY26 estimate by 7 per cent, anticipating lower steel prices and reduced profits in Europe. The revised target price for FY27 is Rs 146, down from Rs 150, and they maintain a ‘Hold’ rating.
 
Morgan Stanley reportedly has maintained an ‘Equal Weight’ rating with a target price of Rs 160, highlighting strong performance in the domestic business, aided by lower costs in freight, handling, and repairs.
 
Notably, CLSA has upgraded Tata Steel to ‘Hold’ from ‘Underperform’ but has cut target to Rs 125 from Rs 135. It noted improvements in the Indian business but ongoing challenges in Europe. They believe the risk-reward profile is balanced.
 
Meanwhile, JPMorgan continues to have an ‘Overweight’ rating with a target price of Rs 155. They pointed to an Ebitda beat driven by lower-than-expected expenses and noted the positive impact of net debt reduction. The average selling price was also slightly better than expected, analysts said.

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First Published: Jan 29 2025 | 7:47 AM IST

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