Tata Stocks Alerts: Should You Buy Tata Steel Shares After £1.25 Billion Deal With UK Govt?

Tata Group's steelmaker, Tata Steel entered into a mega deal with the UK government for jointly investing 1.25 billion pounds in the state-of-the-art Electric Arc Furnace steelmaking at the Port Talbot site. This is also inclusive of a grant of up to 500 million pounds from the Rishi Sunak-led government. On Monday, Tata Steel shares touched a new 52-week high, however, ended on a bearish note. This behemoth is expected to speed-track track decarbonisation of Tata Steel UK. Overall, the partnership is seen as a step in the right direction, and hence brokerages have recommended buying Tata Steel stock.

On Monday, Tata Steel shares ended at Rs 130.45 apiece, down by 1.21% on BSE. However, during trading hours, the company's shares touched a new 52-week high of Rs 134.85 apiece. Overall, the company's market value is over Rs 1.59 lakh crore.

On September 17, the Tata Group-led multinational steel-making company joined hands with the UK government to invest together in state-of-the-art Electric Arc Furnace steelmaking at the Port Talbot site with a capital cost of £1.25 billion inclusive of a grant from the UK Government of up to £500 million.

Further, Tata Steel UK will soon commence consultation on the proposal and the transition period including potential deep restructuring for the carbon-intensive, unsustainable iron and steelmaking facilities at Port Talbot, where many of the existing 'heavy end' assets -such as blast furnaces and coke ovens-are reaching the end of their operational life.

Tata Steel revealed that during the transition period and project phase, Tata Steel UK would work intensively to ensure an uninterrupted and reliable supply of products to fulfil customer and market commitments including through the import of additional steel substrate from stable supply chains to feed its downstream units.

Also, as part of Tata Steel's commitment to advance global research and innovation in materials science for a sustainable future, the Company today also announced its intention to invest approximately £20 million over 4 years to set up two additional Centers of Innovation & Technology in the UK at the Henry Royce Institute at Manchester (for advanced materials research) and at Imperial College London (for research in Sustainable Design & Manufacturing).

The proposed project would also involve Tata Steel's Balance Sheet being restructured with potential elimination of the current cash losses in the UK operations and non-cash impairment of legacy investments.

The partnership is expected to bolster the UK's steel security and would be the first major step towards decarbonisation of the local steel industry, reducing direct emissions by 50 million tonnes over a decade. With a high degree of circularity, it would leverage strategic, domestically available scrap steel and promote local value addition within the UK.

It is a big win for Tata Steel UK as well.

In its research note Kotak Institutional Equities said, "We believe the potential restructuring cost could offset the reduction in losses from the UK over FY2024-26E and be cash flow neutral. Management expects +15% IRR from the new investment and the project could take ~3 years to complete. We see the development as a step in the right direction."

Further, Tushar Chaudhari - Research Analyst, Prabhudas Lilladher in his note said, "Tata Steel has announced a proposal to set up a 3mtpa Electric Arc Furnace at its Port Talbot steel-making facility for capex of GBP 1.25bn. The proposed project will get a GBP500mn grant (40% of the project cost) from the UK government and adequate policy support for a smooth transition to green steelmaking in UK at competitive landscape. While first stage of the process stands complete with this agreement, consultations with unions involved are expected to close in next three months. Capex is planned over next three years post successful consultation and subject to relevant regulatory approvals."

Chaudhari added, "We believe that the Tata Steel UK (TSUK) transition is EPS accretive given a) current cash losses will end, as company will import substrate instead of producing at old facilities, b) one-time cost will exist, but TSUK is expected to be in better situation than earlier case of recurring cash burn, c) volatility in coking coal prices won't directly affect TSUK earnings, and d) likely fall in energy costs, as UK moves towards renewable sources. We revise our FY25E EBITDA estimates upwards by 5% to Rs411bn and introduce FY26E earnings estimates."

On the similar lines, JM Financial's research note said, "Tata Steel UK will continue to ensure uninterrupted and reliable supply of products to maintain their high market share in the UK. We believe that this one time grant is a sentimental positive at best with current operational loses of the plant likely to offset this grant in a matter of couple of quarters - more post the end of the consultation period."

Accordingly, on valuation, Kotak's note said, "We would revise our earnings and cash flows after getting more details following the consultation process. We revise our Fair Value to Rs150/share (from Rs135), as we roll forward to September 2025E from March 2025E. Maintain BUY."

Prabhudas Lilladher analyst has raised its target price for Tata Steel as well. Chaudhari said, "Maintain 'Buy' at revised TP of Rs 144 (Rs 137 earlier) assigning EV/EBITDA multiple of 5x for FY25E EBITDA for TSE."

Disclaimer:

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