Brokerages see more strength in Tata Steel even as stock rallies 131% YTD

The share price of Tata Steel rose another 2.5 percent, continuing its stellar bull run on upbeat sentiment, to hit a fresh 52-week high of Rs 1,498.45 apiece. The stock price has risen over 131 percent this year so far, while the brokerages feel more upside is left after the company reported strong June quarter earnings and provided a robust outlook for India and Europe business.

Last week, the company reported a consolidated net profit of Rs 9,768.34 crore in Q1FY22 as against a net loss of Rs 4,648.13 crore, YoY.  The company's revenue in Q1Y22 jumped to Rs 53,534.04 crore from Rs 25,662.43 crore a year ago.

In its post-earnings conference call, Tata Steel's management gave a strong outlook on Europe and India business operational performance, leading brokerages to raise the target price on the stock.

Tata Steel provided a robust outlook for India and Europe in the Q1FY22 call, guiding for a €200-250/tonne rise in realisations in Europe and a Rs 3,000/tonne rise in India. Management also plans to catch up with peers on Europe profitability in the upcoming quarters. A working-capital rise was due to finished-goods inventory buildup, CLSA said.

The brokerage expects a jump in consensus Ebitda. At 1.4x FY23 PB and ROE of 18%, CLSA finds risk-reward favourable.

It reiterated a 'buy' rating and raised its target price to Rs 1,950 per share from Rs 1,750 earlier.

Citi maintained a 'buy' rating and increased the target to Rs 2,000 from Rs 1,375. It raised FY22/23E EBITDA by 45 percent/17 percent on stronger realizations, recent trends and management commentary.

Citi said it continues to value Tata Steel at 4.5x Sep22 EV/EBITDA.

Jefferies also raised the target on the stock to Rs 2,000, while maintaining a 'buy' call. It upgraded FY22-23E EPS by 14-27 percent.

Despite a huge rally this calendar year, the stock is at 1.5x FY23E PB versus past peaks of 2x. In an upside scenario, see fair value of Rs 2,400 - 2.2x FY23E PB & 65 percent upside, Jefferies said.

Kotak Institutional Equities said Tata Steel's Q1FY22 EBITDA was in line with estimates with stronger India margins offsetting the miss in Europe.

Management commentary suggests that India margins at a record high in 1QFY22 could sustain in the coming quarter and Europe margins could increase by 1-2X from Q1FY22 levels with a price reset in contracted volumes.

Despite growth capex, Tata’s net debt/ EBITDA is likely to sustain at <1X over FY2022-24E, the brokerage said as it sees strong steel prices and management guidance to drive earnings.

Kotak Institutional Equities has a 'buy' rating for the stock and raised the target price to Rs 1,750.

JPMorgan is 'overweight' on the stock with a target of Rs 1,810. It sees upside risks if Chinese steel production cuts continue.

At 12:05 pm, the shares of Tata Steel were trading 1.73 percent higher at Rs 1,486.55 apiece on the BSE.