Q1 Results: Tata Steel Tumbles To Three-Month Low After Earnings Miss As Brokerages Slash Targets

Shares of Tata Steel Ltd. fell to their lowest in nearly three years after a disappointing set of first-quarter earnings led to most brokerages slashing the stock’s price targets.

India’s oldest steelmaker’s profit fell 64.3 percent year-on-year to Rs 693.1 crore in the April-June period, the lowest since December 2016, according to its exchange filing. The company’s margin, too, was at a seven-quarter low on lower volumes, falling steel prices and higher raw material cost.

Tata Steel, however, reiterated its plan to pare debt by deleveraging, including a 25 percent cut in capital expenditure, among others, according to a post-earnings conference call with analysts.

The company also signed an agreement to sell 70 percent stake in its Thailand unit to Dubai-based Synergy Metals and Mining Fund, a day after it terminated the deal with China’s HBIS Group for its Southeast Asian business.

Concall Highlights

• Maintains a billion-dollar debt reduction guidance.
• Lowers capex guidance by 20-25 percent for the ongoing financial year.
• Focus on cost efficiencies and working capital needs that could boost internal cash flows.
• Expects second half to be better on revival of auto, construction demand.
• Second quarter to be softer than first quarter due to seasonality impact.

While most analysts cut target prices, they maintained their bullish investment recommendation on the stock. Around 20 of the 30 analysts covering the stock have a ‘Buy’ rating, while four suggest ‘Hold’ and six recommend a Sell’. The Bloomberg consensus estimate, however, implies a potential downside of 32 percent for the counter.

Tata Steel’s stock dropped as much as 4.1 percent to Rs 366.25 apiece, the lowest in 32 months, according to Bloomberg data.

Here’s what brokerage have to say about Tata Steel’s first-quarter performance:

JPMorgan

• Maintains ‘Overweight’ with a target price of Rs 575 apiece.
• Focus on cash flows a positive.
• Holding on to deleveraging target a positive.
• Capex being recalibrated in line with market conditions and lower cash flows.
• Calibrated debt drawdown for organic expansion; enhanced use of internal cash flows.

Investec

• Maintains ‘Buy’; target price lowered to Rs 562 from Rs 714 a share.
• Contracting mining spreads, weak domestic pricing to weigh.
• Trade measures (25 percent safeguard duties) are a work-in-progress and can’t be ruled out.
• Subdued second quarter, lower probability can reduce the pace of de-leveraging.

Goldman Sachs

• Maintains ‘Buy’ with a target price of Rs 500 apiece.
• Indian operations ahead; Europe significantly below.
• Expects reducing iron ore and coking coal prices to benefit European operations.

CLSA

• Maintains ‘Sell’ and cuts target price to Rs 320 from Rs 395 apiece.
• Weak quarter; sharp fall in Europe business margins.
• Indian steel demand and prices are under pressure.
• Valuations too expensive despite stock fall.