Tata's Steel Stock Faces' Bears Wrath After Kotak Downgrades'; But Jefferies Sees Potential Upside, Why?

Tata Group-backed steelmaker, Tata Steel continues to face the wrath of bears for second consecutive trading session on Thursday, after brokerage Kotak Institutional Equities downgraded its rating on the stock to 'REDUCE' from 'BUY. In a single day, on January 3rd, Tata stock dropped by 4% on the BSE. However, brokerages like Jefferies and Fisdom expect buying opportunities in Tata Steel especially ahead of the general election. And a saffron party's other reign in India is likely to be beneficial for Tata Steel ahead.

On Thursday, in the opening bell, Tata Steel's stock tumbled by nearly 1% to hit an intraday low of Rs 134.05 apiece.

But in the previous session, the stock ended at Rs 135.30 apiece down by over 3% after recording an overall decline of 4% with an intraday low of Rs 134.35 apiece.

Tata Steel's market cap has plunged to Rs 1.65 lakh from the previous day's Rs 1.67 lakh crore.

Tata Steel Stock Price Target

While downgrading the stock, Kotak in its research note said, "TATA's stock price has seen a 20% rally in the past two months, mainly led by broader market buoyancy. We note that the fundamentals have deteriorated at the margin, with (1) raw material outperforming steel prices, suggesting downward pressure on India's spreads from 4QFY24, (2) persistent pressure in Europe's steel spreads and (3) risk of delay in UK's resolution and completion of the KPO-II 5 mtpa expansion. We see riskreward at the current price unfavorable after the recent rally."

According to Kotak, domestic HRC/rebar prices have declined 7%/6%, whereas Chinese export prices are +4.5% in 3QFY24. High inventory at mills/distribution channels and rising imports are exerting downward pressure on prices. Coking coal prices have remained elevated (US$300-350/ton) during 3QFY24 and supply disruptions in Australia should keep prices elevated. Higher raw materials and weaker steel prices suggest downward pressure on steel margins from 4QFY24. Domestic demand remains robust at 15% in 8MFY24, but TATA would benefit only partially due to a lack of new capacity.

Also, the brokerage expects losses to continue in Europe business, given weak spreads. It said, "UK assets are approaching end of life and media reports suggest negotiations with unions on job cuts and new investments face opposition. We forecast EBITDA of US$19/51 per ton in FY2025/26E versus a loss of US$155 in 2QFY24."

Moreover, the brokerage estimates standalone volume growth of 7%/9%/11% in FY2024/25/26E, but see a downside risk to FY2025E estimates.

Tata is well-positioned in the Indian market, with a potential to reach 40 mtpa capacity (from 24 mtpa in FY2025E) from low-cost brownfield expansions. However, the brokerage also added that "we see Europe continuing to consume management bandwidth and India's balance sheet for new investments in the UK. Thus, Europe could potentially slow down expansions in India and we see it as a key de-rating risk."

Accordingly, the brokerage said, "We have revised our FV to Rs145 (from Rs140) as we roll forward to March 2026E. The stock trades at 5.7X EV/EBITDA FY2026E, close to our target multiple, suggesting a limited upside. Downgrade to REDUCE (from BUY)."

BUT...

Some brokerages see a potential upside in Tata Steel's stock price in the long run.

The latest to like Tata Steel's stock price will be global brokerage Jefferies. In its latest note, Jefferies believes Tata Steel stands out for FY25 on earnings performance.

Jefferies added, "Metals should benefit from China stimulus and Tata Steel and Hindalco are the picks." However, Jefferies has not given any target price but recommended buying Tata Steel stock.

Nevertheless, brokerage Fisdom believes that Tata Steel in the steel sector will be among the beneficiaries with the key agendas that are driven by Prime Minister Narendra Modi-government. And majority consensus expects the BJP party to reign again and anticipations are that the key broad agendas outlined in the Manifestos of 2014 and 2019 will continue.

In Fisdom's view, ongoing initiatives for responsible growth, cost optimisation, and the Kalinganagar expansion indicate a long-term commitment to operational efficiency. Also, the brokerage said it is important to note that the stock may attract attention for its potential turnaround and focus on sustainability in the steel industry.

Broadly, brokerage Fisdom believes that Tata Steel stands as a linchpin in India's thriving steel sector, poised to leverage the sector's ongoing growth in CY23 and beyond. Also, its adept financial performance, strategic capex timing, and skilful debt management position place Tata Steel for continued success.

That being said, Fisdom recommends buying Tata Steel for a target price of Rs 155.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.