Tata Steel set to earn a re-rating, and how! | Economic Times

ET Intelligence Group: Tata Steel’s proposed stake sale of its assets in the Netherlands could be a game changer for the stock and lead to a complete re-rating, after shares rallied about 20 per cent in the past 10 days on anticipation its strong September-quarter performance would likely sustain.The company reported higher-than-expected earnings due to a better product mix and cost control, as well as sharp reduction in debt on better cash management.The steelmaker, which has operations in Europe and India, told analysts in a post-earnings call that there was headroom for international steel prices to increase, which will consequently lead to higher domestic prices.Net realisations could increase by another Rs 4,500-Rs 5,000 per tonne due to the price increases and improved product mix, while coking coal prices have dipped. European spreads (realisation less cost) in the quarter was Euro 160-170 per tonne, which is now at Euro 225 per tonne, implying that earnings could rise in the coming quarters.The company said it was talking to SSAB Sweden for a potential deal with respect to Tata Steel Netherlands, a process that could take six to nine months.Its UK assets will be dealt with independently, it said.This is a positive for the stock as its assets in the Netherlands are the most profitable in Europe and will, therefore, fetch better valuations and higher cash.The deal is also unlikely to face any major hurdles like the previous one with ThyssenKrupp AG, due to lack of any product or geographic overlap.The deal is at due diligence and stakeholder consultation stage, and the proceeds will be used to cut debt, a key requirement for any stock up-move.Tata Steel’s consolidated net debt stands at Rs 96,000 crore, which was down 8 per cent sequentially.Net revenues grew 7.4 per cent year on year to Rs 37,154 crore, while earnings before interest, taxation, depreciation and amortisation (Ebitda) jumped 60 per cent to Rs 6,111 crore, helped by a revival in demand from the automobile sector.Ebitda per tonne for its standalone Indian business rose 14 per cent to Rs 12,882.For Europe, the Ebitda — after adjusting for carbon credit provisioning — was positive against expectations of a loss of $46 a tonne.Most analysts are now assigning a 6-7 times FY22 estimated EV by Ebitda multiple to the stock.The stock is currently trading at 5.4 times multiples at its current price of Rs 492.10, which means there is still upside of at least 10 per cent .