Analyst Corner: Assign neutral to Tata Steel with a target price of Rs 1,210

Rising carbon costs in Europe are a major source of concern: Tata Steel (TATA) FY21’s Annual Report emphasises the company’s aim to retain leadership in volumes, cost, and sustainability. With stronger cash flows, the company’s attention has shifted back to expanding its India business, where it hopes to increase capacity to 35–40 million tonnes by 2030.

However, it intends to proceed with caution because debt repayment remains the management’s primary focus. Tata Steel Europe (TSE) management is visibly concerned about Europe’s tighter emission standards, growing carbon credit prices, and the resultant decreased competitiveness versus imports into Europe, which represent a significant challenge in the long run. While we expect deleveraging to continue as prices rise, we believe that growing carbon costs and the weight of sustainability capex in TSE are major worries. As a result, we rate the stock as Neutral, with a target price of Rs 1,210.

However, it intends to proceed with caution because debt repayment remains the management’s primary focus. Tata Steel Europe (TSE) management is visibly concerned about Europe’s tighter emission standards, growing carbon credit prices, and the resultant decreased competitiveness versus imports into Europe, which represent a significant challenge in the long run. While we expect deleveraging to continue as prices rise, we believe that growing carbon costs and the weight of sustainability capex in TSE are major worries. As a result, we rate the stock as Neutral, with a target price of Rs 1,210.

TSE’s costs will be fundamentally increased by rising carbon costs and Brexit: While the near-term prognosis for TSE is positive, driven by higher pricing, structural cost increases from tightening emission regulations and Brexit are a longer-term worry for sustainable profitability and cash-neutrality.

With carbon credit prices presently trading at €52/t (135 percent YoY) and an increasing demand for carbon credit purchases, we anticipate the burden of carbon expenses on TSE will rise in FY22 and beyond. While a portion of this rise should be mitigated by Tata Steel UK’s new carbon fee of €12/t, the sustainability would be dependent on demand-supply tightness.

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