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Tata Steel to Invest GBP 1.25 Billion in Green Steel Project, Receives GBP 500 Million UK Government Grant

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In a significant development for the steel industry, Tata Steel has unveiled plans to establish a 3-million-tonne-per-annum Electric Arc Furnace at its Port Talbot steelmaking facility, with a capital expenditure of GBP 1.25 billion. The ambitious project has garnered substantial support from the UK government, which is set to provide a grant of GBP 500 million, equating to 40% of the total project cost. This initiative aims to facilitate a seamless transition to green steel production within the competitive landscape of the United Kingdom.

While the initial phase of the project has been formalized, consultations with involved unions are expected to conclude within the next three months. The capital expenditure will be distributed over the next three years, contingent on successful consultations and the acquisition of pertinent regulatory approvals.

Prabhudas Lilladher, a prominent brokerage firm, weighed in on the significance of this endeavor. “We believe that the Tata Steel UK (TSUK) transition is EPS accretive,” the firm stated, listing key reasons for their optimism:

  1. Termination of Cash Losses: With the importation of substrate instead of producing it in old facilities, the company will cease incurring current cash losses.
  2. One-Time Costs: While there will be initial one-time costs, TSUK is expected to find itself in a better financial position compared to the previous scenario of recurring cash burn.
  3. Reduced Vulnerability to Coking Coal Price Volatility: The project is expected to mitigate the impact of fluctuating coking coal prices on TSUK earnings.
  4. Potential Decrease in Energy Costs: As the UK pivots towards renewable energy sources, there may be a reduction in energy costs, further boosting the project’s profitability.

As a result of these factors, Prabhudas Lilladher has raised its FY25E EBITDA estimates by 5% to Rs 411 billion and introduced FY26E earnings estimates. They maintain a ‘Buy’ rating for Tata Steel at a revised target price of Rs 144, based on an EV/EBITDA multiple of 5x for FY25E EBITDA.

Furthermore, the brokerage firm incorporated a TSUK capital expenditure of USD 1.55 billion (GBP 1.25 billion) over FY25-27E, along with a reduction in maintenance capex due to the discontinuation of maintenance for old assets. They believe that achieving a sustainable EBITDA per tonne of USD 100 for consolidated Tata Steel Europe (TSE) appears attainable, especially as importing substrate is set to resume from FY25, Tata Steel Netherlands remains profitable, and production from the new TSUK project is anticipated to commence in FY28.

In the technology sector, Tata Consultancy Services (TCS) is also making waves. Sharekhan, another renowned brokerage firm, highlighted TCS’s strong performance in the face of uncertainty. “Despite the uncertain environment, deal momentum for TCS has been robust,” they stated, citing an average of $8.9 billion in deal wins from Q1FY23 to Q1FY24, including significant deals with JLR/NEST and BSNL.

TCS’s ability to leverage its domain expertise, global presence, and cross-selling capabilities has positioned it favorably during these challenging times. The revamp of the organizational structure, spearheaded by the new CEO, is expected to allay concerns and stimulate growth.

Sharekhan maintains a ‘Buy’ rating on TCS with a revised price target of Rs. 4,200. At the current market price, the stock is trading at 25.5x/22.8x its FY25/26E EPS. They anticipate a 9% and 11.2% Sales and PAT CAGR over FY23-26E, underlining TCS’s potential for robust performance.

Summary:

  • Tata Steel plans to invest GBP 1.25 billion in a 3-million-tonne Electric Arc Furnace project at its Port Talbot facility.
  • The UK government is offering a GBP 500 million grant (40% of the project cost) to support the green steel transition.
  • Consultations with unions are expected to conclude within three months, and the capital expenditure will be spread over the next three years.
  • Prabhudas Lilladher believes the project will be EPS accretive, citing the cessation of cash losses, reduced vulnerability to coking coal price fluctuations, and potential energy cost savings.
  • The brokerage maintains a ‘Buy’ rating for Tata Steel with a revised target price of Rs 144.
  • Tata Consultancy Services (TCS) has secured significant deals and is well-positioned for growth, according to Sharekhan, which maintains a ‘Buy’ rating with a revised price target of Rs. 4,200 for TCS stock.
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