Tata Steel Gets ‘Buy’ Rating from Nomura: What’s Driving the Upside Potential?
Nomura has initiated coverage on Tata Steel Ltd. with a ‘Buy’ rating and a target price of Rs 215, implying an upside potential of 25%. The brokerage sees strong growth in India, turnaround in Europe, and improving macros as key drivers for the stock.
The ‘Buy’ rating is based on Tata Steel’s domestic focus amid strong demand dynamics, improved utilization from its Kalinagar facility, and a partial benefit of lower iron ore costs likely to persist after FY30F. Nomura derived a target price of Rs 215 for Tata Steel by applying a slightly higher-than-historical mid-cycle one-year forward EV/Ebitda of 6.9 times. The stock currently trades at 2.1 times P/B.
Indian Growth Story
India’s growth story is a key driver for Tata Steel’s upside potential. The brokerage expects Tata Steel to strengthen its leadership in India over the next few years, driven by capacity expansion, efficiency gains, and sustainability initiatives. Indian stock market news has been positive, with the Nifty and Sensex reaching new highs. Tata Steel is well-positioned to benefit from this growth, with its strong presence in the domestic market.
The company’s capacity expansion plans, including the Kalinganagar plant, are expected to drive growth and improve utilization rates. Additionally, the company’s focus on sustainability initiatives is expected to drive long-term growth and profitability.
Tata Steel’s European Operations
Nomura also expects a turnaround in Tata Steel’s European operations, which have been a drag on the company’s performance in recent years. The brokerage believes that the company’s European operations will benefit from improving demand and pricing, driven by a recovery in the global steel market.
The turnaround in European operations is expected to be driven by a combination of factors, including cost-cutting measures, improved efficiency, and a focus on high-margin products. The company’s European operations are expected to become a significant contributor to its profitability in the coming years.
Improving Macros
The brokerage also expects improving macros to drive Tata Steel’s growth, including a recovery in global steel demand and pricing. The company’s low-cost production base, driven by its captive iron ore mines, is expected to provide a competitive advantage in a rising price environment.
The improving macros are expected to drive growth in the steel industry, with steel industry news indicating a positive trend. Tata Steel is well-positioned to benefit from this growth, with its strong presence in the domestic market and its focus on sustainability initiatives.
Risks and Challenges
However, Nomura also listed some risks for Tata Steel, including delays in Neelachal Ispat Nigam Ltd.’s (NINL, unlisted) expansion, weaker-than-expected demand growth, lower spreads, and sustained elevation in iron ore prices beyond FY30F.
The brokerage believes that investor concerns over the potential loss of iron ore mines post-FY30 are unwarranted and overstated. The company’s presence of non-auctioned captive mines, even after FY30, is expected to provide a competitive advantage and drive growth.
Investment Thesis
Nomura’s investment thesis for Tata Steel is based on the company’s strong growth prospects, driven by its domestic focus, turnaround in European operations, and improving macros. The brokerage expects the company to strengthen its leadership in India over the next few years, driven by capacity expansion, efficiency gains, and sustainability initiatives.
The company’s low-cost production base, driven by its captive iron ore mines, is expected to provide a competitive advantage in a rising price environment. The brokerage expects Tata Steel to remain the lowest RM cost/t player in the industry, largely on account of its presence of non-auctioned captive mines, even after FY30.
Overall, Nomura’s ‘Buy’ rating for Tata Steel is based on the company’s strong growth prospects, driven by its domestic focus, turnaround in European operations, and improving macros. The brokerage expects the company to strengthen its leadership in India over the next few years, driven by capacity expansion, efficiency gains, and sustainability initiatives.
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