Macquarie sees 74% upside in Tata Steel shares post Q1 earnings, here's why

Shares of Tata Steel fell after six sessions of gains after the Tata Group firm logged a 21 per cent fall in its net profit in the first quarter of the current fiscal. Tata Steel stock declined 1.11 per cent to Rs 950.15 today against the previous close of Rs 960.90 on BSE.

However, Macquarie expects the stock to reach Rs 1,670 (73.79 per cent higher to the previous close) in a year. The brokerage said consolidated earnings before interest, taxes, depreciation, and amortisation (EBITDA) beat expectations.

Motilal Oswal said EBITDA rose to Rs 9,700 crore (-28 per cent YoY/-22 per cent QoQ) and was 25 per cent higher than its estimate of Rs 7,600 crore. The entire EBITDA beat was driven by 7 per cent revenue beat.

Adjusted PAT stood at Rs 6,200 crore (-29 per cent YoY/-22 per cent QoQ) and was 39 per cent  ahead of the estimates of the financial services firm.

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Meanwhile, Tata Steel shares were trading higher than the 5-day and 20-day moving averages but lower than 50-day, 100-day and 200-day moving averages.

Total 5.75 lakh shares of the firm changed hands amounting to a turnover of Rs 55.27 crore on BSE. The market cap of the firm fell to Rs 1.16 lakh crore on BSE.

Tata Steel stock hit a 52-week high of Rs 1,534.60 on August 16,2021 and a 52-week low of Rs 827.10 on June 23, 2022.

The steel producer logged a consolidated net profit of Rs 7,714 crore in Q1 against Rs 9,768 crore in the corresponding quarter of FY22.

The firm's India business saw net profit falling 36.5 per cent compared to the corresponding quarter of FY22.

The net profit for India business dipped to Rs 5,783 crore in Q1FY23 against Rs 9,112 crore in Q1FY22.

"This has been a challenging quarter for the global and Indian economy with rising interest rates, supply chain constraints and slowdown in China due to COVID. Despite these multiple headwinds, Tata Steel has delivered a strong performance with an improvement in margins," said TV Narendran, CEO & MD, Tata Steel.

ALSO READ: Tata Steel net profit falls 21% YoY to Rs 7,714 crore in Q1FY23

Net debt of the company was pegged at Rs 54,504 crore with the net debt to EBITDA at 0.87 times and net debt to equity at 0.48 times.

Macquarie said consolidated EBITDA beat expectations. European Union (EU) EBITDA per tonne surprised positively, as lagged impact of a steel price hike was reflected during the June quarter. The brokerage expects profitability to fall in second half of FY23 given a recent correction of steel prices in EU.

JPMorgan is overweight on the stock with a target price of Rs 1,400. "Its substantial all around beat was driven by performance in Europe.  While Q2 is seasonally weak, the firm should rebound in H2. Large Q1 beat with Europe EBITDA/tonne at $365 per tonne, the brokerage said. Steel prices bottomed in India and lower coking coal to drive earnings rebound in the second half of this year," it added.

"Tata Steel's standalone revenue at Rs 31,700 crore (+18% YoY/-13% QoQ) was 7 per cent above our estimates of Rs 29,700 crore, driven by 7 per cent beat on ASP. Revenue beat stood at Rs 2,100 crore. Maintain Neutral with a target price of Rs 975 based on SoTP valuation," said Motilal Oswal.

ICICI Securities has maintained a reduce call on the stock.

"We maintain REDUCE with an unchanged target price of Rs 827 per share as we wait for the EBITDA contraction cycle to play out (we expect the downcycle to last 4-5 quarters with peak being attained in Q2FY22)."