Shares of Tata Steel have lagged behind key domestic steel industry peers over the past three months, a performance attributed by Elara Capital to persistent concerns surrounding its European business. Additionally, the potential narrowing of its margin gap with competitors post-2030 and recent group-related news flow have weighed on the stock.
However, the domestic brokerage suggests that these concerns are largely factored into Tata Steel's current valuation. Elara Capital has reiterated its 'Buy' rating for the stock, maintaining a 12-month target price of Rs 235, which implies a potential upside of approximately 26% from recent closing prices.
Valuation Discount Widens Against Competitors
Historically, Tata Steel has traded at an enterprise value to EBITDA (EV/EBITDA) discount compared to major rivals. Over a five-year average, this discount stood at about 28% against JSW Steel Ltd and 11% against Jindal Steel Ltd. Elara Capital notes that these discounts have recently widened significantly, reaching around 39% and 32% respectively at current valuations.
Furthermore, the relative valuation against Steel Authority of India Ltd (SAIL) has reversed. Tata Steel, which historically traded at a premium, is now observed to be trading at approximately a 19% discount to SAIL, according to the brokerage's analysis.
European Operations in Focus Amid Challenges
Tata Steel's European operations faced significant headwinds, turning EBITDA-negative in Q1 FY27. This downturn was largely a result of the temporary shutdown of its Direct Sheet Plant (DSP) in the Netherlands, necessitated by chromium emissions exceeding permissible limits.
With the DSP having restarted operations in August, Elara Capital anticipates a sequential improvement in the European business's profitability, projected from Q2 FY27 through Q1 FY28. Further improvements are expected in Q3 FY27 as the plant achieves more stable operational levels. The brokerage also highlights that Q4 FY27 could benefit from the scheduled implementation of the Carbon Border Adjustment Mechanism (CBAM) in the UK, with additional gains anticipated in Q1 FY28 as annual contract repricing takes effect.
Domestic Steel Market Shows Resilience
Despite Q2 typically being a seasonally weak quarter for Indian steel, with Hot-Rolled Coil (HRC) prices historically declining by an average of 5.7% over the past five years, Q2 FY27 HRC prices have shown resilience. Elara Capital observed a rise of around 2% so far from the Q1 FY27 average.
This stronger-than-expected performance in the domestic market is attributed to several factors, including restocking demand, robust demand from the auto sector, improved construction activity, and particularly strong demand for galvanised products within the automotive industry.
Elara's target price of Rs 235 is based on a valuation of 6.5x EV/EBITDA for Tata Steel's Indian operations and 4x for its European operations.