Tata Steel Ltd

BY
PRANAV DOSHI
 Investment Summary
Investment Thesis Key Value Drivers
• Tata Steel has been the leader in the Indian Steel industry. They are • Tata Steel is focused on increasing their domestic market share, thus
very optimistic about their growth. They have captured increasing increasing their dominance. Stock Details
domestic demand successfully. • Dependency on exports is decreasing. Exports are now down to only Name TATASTEEL
• The company has managed to reduce over ₹20,000 worth of debt 12% in Q2 FY 22 as opposed to 16% 2 quarters ago.
Face Value ₹ 10.00
despite the adverse impact of Covid. • US decision on Section 232 will open up a major market for Tata Market Cap (in Cr) 1,32,000.00
• Despite facing high raw material prices and reduced demand, Steel’s operations in Europe.
Shares Outstanding (in CR) 122
company has displayed strong results. As a result, EPS is expected to • Clear vision of the management to reduce net debt, along with Free Float 63.20%
jump to 293 for FY 22 as 77 in FY 21.
investment in growth and sustainability, 52 week high/low 1534.5/596
Shareholding Patter  
Key Business Risks
Promoter 0.3392
Risk to Rating and Price Target
FII 0.2136
Increase in raw material prices Forex risks, hedging is done
Key Downside Risks DII 0.182
Public 0.2651
Regulatory risks Sharpe surge in power charges in EU
 Raw Material prices continue to be high Others 0.0001

Key Conference Call Takeaways  Pledged shares 5 Year Return Comparison

• Tata Steel is targeting rigorous deleveraging. They have also given
loans to their subsidiaries in order to aid them to make advance
 Surge in raw material, power prices in Europe 400
350
repayment of debt. 300
Key Upside factors 250
• Chinese production of steel is continuously dropping month-on-month. 200
• The board has approved Tata Steel BSL merger with Tata Steel.  Opportunity in the US 150
100
• Capex of ₹10-12 crores to be done for FY 22. 50
• Roadmap+ project is their long-term goal to reduce environmental
 High capex, reduced dependence on exports
0

load of multiple Tata Steel projects.

 Decreasing Net and Gross debt Tata Steel Nifty 50
• Company expects prices to be high but rangebound.

Investment Decision: BUY Target Price: INR 1400 Current Price: INR 1085
29%
 INDUSTRY OVERVIEW
Industry Overview
•TISCO was the first company in India to start production of steel in 1907.
•By 2019 India was the second largest crude steel producer in the world. Indian Steel Industry (Mn Tonnes)
•An additional $156.08 billion of investment is expected to flow into the steel industry by 16 10
14
FY 31. The industry has good growth prospects, owing to recent policy changes both 14 13
8
within and outside the country. 11.71 6
12 10.79 4
•Companies realise the importance of sustainable practices, absence of which can 10 9.62
2
translate into headwinds as policy makers continue to focus on sustainable development. 8
8.24
7.22 7.48 7.83 8.24
0
6.69
Tata Steel who has been a leader of sustainability was recently joined by JSW steel in the 6.36 6 -2
6 4.75 5
DJSI Emerging Markets. 4.08 -4
4
•The National Steel Policy aims to boost per capita consumption of steel to 160 kg by -6
2
2030. This is over twice the current per capita consumption of 74.1 Kg. -8
0 -10
FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 P FY 23 P

Import Export Net exports

Production capacity (Mn tonnes) Production By Type

350
300
300 %
R :7 26% BOF
250 G
CA EAF
200 45% IF
142
150
100 28%

50
0
FY 20 FY 31 P
 Key Trends & Drivers of Growth
• 100% FDI is allowed in the steel sector through
automatic route End users of Steel Industry
Policy Support • National Steel Policy aims to boost growth in longer
term by 2030.
• Vehicle Scrappage policy will help reduce steel costs. 20%

• The Appliance and Consumer Electronics is expected

40%
to grow at CAGR of 9.91% contributing to growth of
steel industry. 10%
Rising Demand • Construction sector, the largest end user of steel,
has a CAGR of over 10% according to Mordor
Intelligence.
30%
• With relaxations in FDI, there have been increased
investment in steel industry.
Increasing Investments • Domestic companies are also actively looking for Construction Infra Auto Engineering
acquisition opportunities. The largest was Tata
Steel’s acquisition of Bhushan steel for $5.4 billion.
FY 20 FY 21 FY 22 P
• In July 2021, Tata Steel collaborated with start-ups
to implement EV’s for steel transport. 0% 5% 14%
Construction
Strategic Alliances • JSL signed a MOU with TSML for mining operations
of common boundaries in Odisha.
4% 3% 13%
• JSW took over Bhushan Power to boost production. Infra
• Ministry of Steel has made it necessary to spend at
Auto 17% 10% 12%
least 1% of sales turnover on R&D.
Technology • Tata Steel collaborated with FarEye to improve its
5% 9% 11%
digital transformation process. Engineering
• Efficiency projects for mills with obsolete technology and Packaging
 COMPANY OVERVIEW
Tata Steel
•Tata Steel is the first steel producing company of India, It was established in 1907 Gross Revenue Through ECA ( ₹cr)
•The company has presence in over 5 continents and employs over 65000 people4 9000
•The company caters to clients across multiple domains: Automotive, Industrial and 1% 7826
8000 R:2
General Engineering, Construction and Agriculture. CA G
7000 6460
•Tata Steel board has recently approved a merger of Tata Steel and Tata Steel BSL.
6000 %
•The company has over 150 distributors in India as of Q2 FY22. 0 1
•Owing to strong performance in the preceding quarters, the company got a boost in 5000 :1
A GR
credit ratings from both Moody’s and S&P. Currently it rated BBB- and Ba1 by S&P and 4000
3213
C
Moody’s respectively. They are investment grade company according to S&P. 3000
•The company has been a part of DJSI Emerging Markets index for 9 consecutive years 2000
and has been ranked among top 5 steel companies in the world in terms of sustainability. 1000
0
1H FY21 2H FY21 1H FY22

Shareholding patt ern

0.01
0 5 10 15 20 25
27% 34% Tata Steel 19.4

18

AM/NS India 10

8.6
Electrosteel
1.88
18% Steel
21% 0.8
Jindal Stainless
0.78
(Hisar)
Promoter FII DII Public Others
 Key Performance Indicators
EBITDA MARGIN EBITDA/Ton (Rs.) Interest Coverage Ratio
35.0%
25000 14
22636
30.0% 28.9% 11.6
12
20000
25.0% 10
18.9% 19.8%
20.0% 17.2% 15000 8
14.5% 11110 10838
15.0% 12.2% 9337 6
10000
7129 3.9 3.9 4.1
10.0% 6267 4 3.4
5000 2.4
5.0% 2
0.0% 0 0
FY 17 FY 18 FY 19 FY 20 FY 21 1H FY 22 FY 17 FY 18 FY 19 FY 20 FY 21 1H FY 22 FY 17 FY 18 FY 19 FY 20 FY 21 1H FY 22

Gross & Net Debt (Rs Crore) Net Debt/EBITDA Net Debt/Equity
140000 7 2
116328 5.91 1.8 1.72
120000 6
100816 1.6
100000 92147 88501 1.37 1.43 1.42
83014 104779 78163 5 1.4
80000 94879 4.25
1.2
60000 72367 69215 75389 4 0.98
63860 3.2 3.19 1
0.79
40000 3 0.8
2.44
20000 0.6
2
0 1.21 0.4
FY 17 FY 18 FY 19 FY 20 FY 21 1H FY 22 1 0.2
0
Gross Debt Net Debt 0 FY 17 FY 18 FY 19 FY 20 FY 21 1H FY 22
FY 17 FY 18 FY 19 FY 20 FY 21 1H FY 22
 Risks & Growth Drivers
Growth Drivers Growth Drivers

• Companies are adopting the China + 1 Strategy to venture into Raw material prices
emerging markets like India, • Raw material prices have increased in
Reducing Chinese • The Blue Sky Policy by the Chinese Government has lead to a the past quarters due to supply chain
Power crackdown on the domestic steel Industry. disruptions.
• With new variants showing up, they
The company has tried venturing into new business to diversify can cause further problems for the
•
the revenue sources company.
New Businesses • The 2 new business segments, Services and Solutions (Nest-in)
and Digital incentives (Tata Aashiyana, Magic Box).
Covid-19 Power Crisis in EU
• The National Steel Policy 2017 has been a major driver for the
industry. • The pandemic has caused • Acute shortage of electricity in
Government • The Vehicle Scrapping policy as an effort to reduce emissions will problems for end users and steel Europe.
Initiatives lead to recycling and cheaper recycled raw materials. industry as well. • Netherland &UK operations could
• If there is a surge in covid then the suffer from increased electricity
• The company is expecting increased demand from automobile company will face demand and prices for foreseeable future.
industry as it resolves the semiconductor crisis. operational issues.
Global drivers • European business is expecting better sales due exemption from
section 232 from Jan 1 2022.
Forex risk Regulatory risk
• The company is aiming for raw material security beyond 2030
• To achieve this, they have done several acquisitions of iron ore • The company gets 10-15% of it’s • Governments across the globe
Vertical integration mines. The most recent acquisition was of Gandhalpada mines in revenue from foreign operations. have been trying to curb pollution
Odisha. • The exchange risks due to foreign to achieve sustainability goals.
operations and exports are • While the company is a global
nullified through active hedging leader in sustainability it faces risk
practices. of stringent government norms.
 Financial Analysis
  Tata Steel Tata Metaliks Vardhman Jindal Stainles Jindal Hissar SAIL JSW
Return on Equity (ROE) 9.76% 16.91% 9.62% 13.03% 23.14% 9.14% 17.14%
EBITDA Margin 19.80% 20.58% 12.53% 11.68% 11.99% 18.43% 25.23%

Trade Receivable Turnover 16.38x NA NA 13.05x 10.26x 9.66x 17.80x

Total Asset Turnover 0.64x 1.03x 1.16x 1.14x 1.33x 0.58x 0.54x
Current Ratio 0.91x 2.32x 2.09x 0.98x 1.47x 0.74x 0.86x
Assets to Equity Ratio 319.92% 143.21% 174.75% 333.54% 235.04% 262.62% 321.42%
Price/Sales Ratio 0.59x 1.35x 0.60x 0.27x 0.32x 0.47x 1.42x

1)The Return on Equity for Tata Steel is slightly below the industry median. This is
expected to increase significantly as the EPS of Tata Steel is expected to increase
Debt to Asset Rati o trend
four-fold in FY 22. 60.00%

2)The company has the 2nd best EBITDA margin among its peers, only lagging behind 48.82%
50.00% 46.15%
Tata Metaliks. Thus its Operational efficiency is better than peers 43.36%
39.99%
3)Tata Steel has median level of Price to Sales ratio. It can significantly improve given 40.00%
the brand image of the Tata Group. 33.68%

4)Current ratio is also above median levels. Tata Steel has focused on rigorously 30.00%
decreasing the debt, hence it can be expected to significantly improve in coming
20.00%
years.
5)They almost lead in the Assets to Equity ratio segment. For every rupee of equity 10.00%
contributed by the shareholder, company owns over 3 times the assets.
6)As can be seen from the trend of Debt to Asset ratio, the company has constantly 0.00%
2017 2018 2019 2020 2021
been on a path to deleveraging.
 Valuation
DCF Valuation
Sensitivity Analysis
2022 (P) 2023 (P) 2024 (P) 2025 (P) 2026 (P) Growth rate
EBIT 46,239.86 47,514.35 41,174.53 51,327.12 62,219.81
EBIT*(1-T) 32,367.90 33,260.04 28,822.17 35,928.98 43,553.87 2% 2.50% 3% 3.50% 4%
1,183.98
Add: Depreciation 11273 13017 14706 16571 17539 9.50% 1236.05 1332.34 1443.46 1573.09 1726.29
Less: CAPEX 21234 23680 23315 25818 27333 WACC 10% 1123.10 1205.84 1300.40 1409.50 1536.79
Less: Change in WC 3017.14215 -37.08787 -2107.779 8137.354 16025.7425
10.5% 1029.57 1101.93 1183.98 1277.80 1386.14
FCFF 19,389.69 22,633.76 22,320.43 18,544.48 17,734.69
11% 934.55 997.14 1067.55 1147.35 1238.54
  TV 2,44,635.28
11.50% 855.03 910.03 971.50 1040.66 1119.03
 
WACC 10%
Period 1 2 3 4 5 DCF Valuation
PV of FCFF 17,552.49 18,547.79 16,557.92 12,453.33 1,59,497.11
  EV/
EV 2,24,608.65 Relative valuation ₹1617.73 Company PE EBITDA
ADD: Cash 5782.18 JSW Steel 8 5.6
DCF ₹1183.98
Less: Debt 82675.9 Sail 3.4 2.8
Less: Non controlling interest 3269.68 Value per share ₹1400.85 Jindal Stainless 6.3 4.9
Mcap 1,44,445.25 Jindal Stainless Hisar 4.8 4.2
Shares outstanding( in crore) 122 CMP 1085 Vardhman Special
Value per share 1,183.98 Steel 10.2 6.4
Potential upside 29.1% Tata Metaliks 10.2 5.9
Tata Steel 4 3.4
Median 7.15 5.25
For detailed
workings
Thank
You
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