Tata Steel is planning a significant capex to augment its Indian capacity to 40mt from 21mt by FY30. This is owing to a robust steel demand across key sectors, such as construction, infrastructure, automobiles, railways and white goods. The backward integrated player remains buoyant about domestic steel demand over the next decade.

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In the fourth quarter of FY23, Tata Steel reported an 84 percent year-on-year decline in consolidated net profit at Rs 1,566 crore due to falling demand in Europe and weak steel prices. The total revenue at Rs 62,961 crore was higher than the CNBC-TV18 poll of Rs 58,962 crore. Although, full year performance was affected by lower steel demand in second half, rising interest rates, elevated input costs and geopolitical volatility.

The company is increasing its downstream capacity across tubes (1mt to 4mt), wires (0.45mt to 1mt), tinplate (0.38mt to 1mt), and DI (0.2mt to 1mt). Motilal Oswal says Tata Steel's focus on product enrichment will help the company to augment its portfolio of value-added products. The brokerage has a Neutral rating on the stock with a target price of Rs 110. The current market price is Rs 113.

The company in its FY23 annual report states that is on track to double the domestic capacity by FY30. It also plans to increase the share of long steel products to 33 percent from 23 percent in the same period. Tata Steel has already commissioned the first circuit of 6mt pellet plant, pickling line and tandem cold mill line of 2.2mt cold olling mill complex in FY23, in an attempt to enhance its product mix and drive cost savings.

Furthermore, in the ongoing financial year, Tata Steel is expected to incur a capex of Rs 16,000 crore, including Rs 7,000 crore for the Kalinganagar expansion, which will increase its existing capacity to 8mt by FY25-26 from 3mt.

A robust domestic demand augurs well for the steel maker. Being a preferred supplier to the Indian automotive sector, Tata Steel’s dispatches to the auto sector grew 7 percent in FY23. An overall growth in steel demand is expected to mimic the GDP growth rate.

Tata Steel has a strong presence in the UK, however, the operations have been a drag, with dispatches declining by 0.47mt to 3.02mt in FY23. Some of the heavy upstream assets are facing ageing issues and are approaching the end of their useful lives in the next 12- 24 months.

Post amalgamation, Tata Steel to be a steel behemoth

The ongoing amalgamation process of seven of its subsidiaries and one associate company into Tata Steel is expected to be concluded by the end of FY24. Tata Steel is merging four of its listed entities, namely Tata Steel Long Products Ltd, Tinplate Company of India Ltd, Tata Metaliks Ltd and TRF Ltd in the swap ratio of 6.7, 3.3, 7.9 and 1.7 for every 1 share of TATA, respectively.

The amalgamation will enable it to achieve higher synergies, drive significant

cost savings, undertake focused growth capex, increase market presence across product lines, and consolidate market share under a single unified brand, says Motilal Oswal in a report.

"The Company has made substantial progress in its simplification journey and is working on the amalgamation of seven subsidiaries and one associate company into and with Tata Steel” N. Chandrasekaran, Chairman of Tata Sons message from Tata Steel annual report.

Positive outlook

EBITDA margins were affected by a slowdown in the steel sector, especially in

second half of FY23. However, as the share of value added products increase and as the new facility comes on stream, margins are expected to improve further.

Also, Tata Steel is successful in reducing the debt by Rs 3,700 crore in fourth quarter of FY23 through working capital release. It expects debt to reduce further through inventory liquidation. Net debt/EBITDA currently is below the long term average of 2.6 times. It expects to resume its deleveraging exercise and targets to reduce the debt by $1 billion in FY24.