Rising carbon fees in Europe a important concern: Tata Steel (TATA)’s FY21 Annual Report highlights the ambition of the corporation to preserve leadership in volumes, price, and sustainability. With enhanced money flows, the focus is back on expanding the India business enterprise, wherein it aims to double capacity to 35–40mt by 2030.
However, it plans to tread cautiously on this path as debt repayment remains the focal point for the management. On Tata Steel Europe (TSE), the management palpably seems concerned about the tightening emission norms in Europe, increasing carbon credit fees, and the resulting reduce competitiveness against imports to Europe, which pose a important challenge in the longer term. While we anticipate deleveraging to continue on the back of greater costs, increasing carbon fees and the burden of sustainability capex in TSE are important issues, in our view. Thus, we assign a Neutral rating, with TP of Rs 1,210.
Rising carbon fees and Brexit to structurally enhance TSE’s fees: While the close to-term outlook for TSE is powerful, driven by greater costs, then structural enhance in fees from tightening emission norms and Brexit is a longer term concern for sustained profitability and money-neutrality.
With carbon credit costs trading at €52/t (135% YoY) presently and then expanding will need for carbon credit purchases, we think the burden of carbon fees on TSE is most likely to enhance in FY22 and beyond. While a component of this enhance must be offset by the carbon surcharge of €12/t not too long ago levied by Tata Steel UK, the sustainability would rely on demand-provide tightness.
Valuation and view: With the availability of captive iron ore, TATA’s India operations are a play on steel costs which we think must remain greater for longer. We for that reason anticipate margins to remain higher in the medium term (with standalone EBITDA/t most likely at a new lifetime higher of Rs 33,000/t in 1QFY22). TSE’s margin must also be powerful in FY22 (we expectn >USD100/t), even though sustenance of the identical would be challenged by increasing carbon fees. We anticipate consolidated income/EBITDA/PAT to develop 36%/94%/2.9x to Rs 2,134b/ Rs 592b/Rs 326b in FY22. Deleveraging must stay powerful in spite of the resumption of development capex. We anticipate net debt to decline a additional Rs 204b to Rs 621b in FY22. We arrive at our TP of Rs 1,210/sh on FY23E EV/EBITDA of 5x for its Indian operations and 4x for Europe.
Our TP implies EV/capacity of USD902/t, a 30% premium to the previous 5-year typical of USD700/t to aspect in the advantage from most likely deleveraging from the existing upcycle. Given restricted upside, we on the other hand price it Neutral.