Tata Steel: Up 64% in last 1 year, this auto stock is Axis Securities' ‘pick of the week’ – 4 key reasons why

Following an almost 64 percent rise in the stock in the last 1 year, domestic brokerage house Axis Securities has picked auto major Tata Steel as its 'top pick of the week'. This is due to reduced costs in Europe, increased capacity in India, lower coking coal prices, and strong operations in India.

The brokerage has a ‘buy’ call on the stock with a target price of ₹179, implying a potential upside of 10 percent.

Tata Steel Group is one of the world’s largest steel companies with a steel production capacity of 35 mtpa. According to the World Steel Association (WSA), the group ranked 10th globally in terms of crude steel production (29.5 mtpa) in 2023. Established in India as Asia’s first integrated private steel company in 1907, the group has a presence across the entire value chain of steel manufacturing, including producing and distributing finished products as well as mining & processing iron ore and coal for steel production.

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Stock Price Trend

The stock has surged over 64 percent in the last 1 year and 30 percent in 2024 YTD. The stock has jumped over 8 percent in June so far, extending gains for the 5th straight month. The auto major added 1.3 percent in May, 5.8 percent in April, 10.65 percent in March, and 3.6 percent in February. However, it was in the red in the first month of the year, down 2.6 percent in January.

The scrip hit its record high of ₹182.10 in intra-day deals today. However, the stock has rallied over 68 percent from its 52-week low of ₹108.15, hit on June 26, 2023.

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March quarter earnings

In the March quarter, Tata Steel posted a 64.8 percent fall in its consolidated net profit at ₹554.6 crore, compared to ₹1,566 crore in the corresponding period last year. The revenue from operations for India's second-biggest steelmaker by market capitalisation, however, fell 6.8 percent to ₹58,687.3 crore in the March quarter as against ₹62,961 crore in the year-ago period.

“In India, which is a structurally attractive market, we have delivered improved margins and continued to expand our footprint in terms of volumes as well as product portfolio. Our domestic deliveries were best ever at around 19 million tons and were up nine percent YoY with broad-based improvement across chosen market segments,'' said T V Narendran, Chief Executive Officer (CEO) and Managing Director (MD), Tata Steel.

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Investment Rationale

• Costs to ease up in Europe in the next year: The UK business will shut down its BF4 and BF5 by June and September 2024 respectively. It will utilize HR coils mainly from India and the Netherlands to supply downstream assets until the commissioning of the 3.0 MT EAF by FY27. The UK business is projected to achieve cash neutrality in H2FY25 and become EBITDA positive from FY26. In the Netherlands, with the completion of BF6 relining, positive EBITDA per ton is expected and it will turn net cash flow positive from Q1FY25, said Axis.
• Enhancing Indian footprint: The brokerage noted that in FY25, the 5mtpa KPO Phase II expansion project is anticipated to contribute 1.7 MT of production. However, due to the relining of BF-G at Jamshedpur, there will be a loss of volume, resulting in a total incremental sales volume of 1.4 MT on a consolidated basis. The KPO-II EBITDA per ton is expected to outperform other Indian assets. As KPO-II reaches its rated capacity of 5mtpa, which is anticipated by FY26, India's blended EBITDA per ton will improve, it said.

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• Green Steel transition in Europe: Tata Steel anticipates that with the implementation of the CBAM (Carbon Border Adjustment Mechanism), steel exports to the UK and EU will become costlier in the future. Therefore, the green steel transition in these regions will be crucial for Tata Steel's strategic planning, stated Axis. The brokerage foresees a return on capital employed (ROCE) of 12-15 percent consistently across economic cycles from its investments in transitioning to Electric Arc Furnace (EAF) and Direct Reduced Iron (DRI) technology in the UK and Europe.
• According to the brokerage, Tata Steel plans to finance the green steel transition in the UK and Netherlands through a mix of internal resources, project funding, and government assistance. It has secured a £0.5 billion grant (non-binding agreement) from the UK government for transitioning its 3 MTPA Electric Arc Furnace (EAF), replacing the 3.5 MTPA Blast Furnace (BF). In the Netherlands, for the transition of BF-6 & 7 to the Direct Reduced Iron (DRI) route, the Dutch Parliament has authorized the government to negotiate potential support terms towards Tata Steel Nederland's decarbonization proposal, added the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.