Industry at pre- Covid levels in terms of volume, price – Tata Steel

Update on the Indian Equity Market:

On Tuesday, Nifty ended 1.1% higher at 13,109. The top gainers for Nifty 50 were GAIL (+8.3%), Sun Pharma (+5.7%), and IndusInd Bank (+4.9%) while the losing stocks for the day were Nestle (-2.6%), Kotak Bank (-1.5%), and Titan (-1.3%). The top gaining sectors were Realty (+3.3%), PSU bank (+2.9%), and IT (+1.9%). FMCG (-0.04%) was the only losing sector.

Edited excerpts of an interview with Mr T V Narendran, MD & CEO, Tata Steel Ltd; dated 01st December 2020 from Business Standard:

Recovery has been faster than expected for the steel sector and prices have touched a high.

Talking about the steel prices Mr Narendran said that the long-term average for steel prices in the past 10-12 years have been $600 a tonne. Steel, iron ore & coal prices are just about coming to long- term spreads.
In India, he is very optimistic in terms of demand as across the sectors there is a pickup in consumption. There is some concern that a fresh wave of the Covid-19 virus can disrupt recovery, but, otherwise, the steel consumption growth rate has to match or exceed that of the GDP. So, the steel industry has to do well and Tata Steel, being one of the lowest-cost producers with a very strong franchise, will deliver it.

About the economic recovery he said that even though the industry has shifted from exports to domestic, they are struggling to keep up with market requirements, which is a good problem to have. The industry had expected the normalcy to return in March-21 quarter but it is already at the pre- covid levels, both in terms of volumes & prices.

The segments that recovered faster than expected according to Mr. Narendran are automotive where first passenger cars started to pick up; the commercial vehicle segment was slow but medium & light commercial vehicles started showing improvement from September. The heavy vehicle segment has also started to pick up.

The more recent surprise was the recovery in the residential housing market.

Tata Steel will be focusing on completing the second phase of the Kalinganagar plant. This will take the capacity to 25 million tonnes (MT) from 20 MT).

The Company will try to grow at least at the rate at which consumption of steel is growing in India.

The Company’s India business generates enough cash to support the Company’s growth. They are confident of growth without adding to the debt.

Once Tata Steel is on track as far as deleveraging goes and the SSAB transaction is done, the Company will be in a comfortable position. Even the Board will be in the position to continue to support the growth.
The Company participates and bid for iron ore mines at prices that would work for them. Tata Steel will keep bidding for mines that come up for auction in the hope of getting some at reasonable prices.

Consensus Estimate: (Source: market screener website)
The closing price of Tata Steel Ltd was ₹ 587/- as of 01-December-2020. It traded at 25.5x/ 9.4x/9.2x the consensus earnings per share estimate of ₹ 23.0/62.5/64.1 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 572/- implies a PE multiple of 9x on FY23E EPS of ₹ 64/-.

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