Tata Steel Surges After £1.25 Billion Deal with UK Government; Brokerages Recommend ‘Overweight’ Rating

Tata Steel Ltd witnessed a modest uptick in its share value on September 18 following a significant joint agreement with the UK government. The deal entails an investment of £1.25 billion in Tata Steel’s Port Talbot facility in Wales. As of 9:36 am, the company’s shares were trading at Rs 132.85 on the BSE, marking a 0.68 percent increase. Over the past month, the stock has gained 14.38 percent, and in the last six months, it has surged by an impressive 26.75 percent.

Under this landmark agreement, the Tata group company and the UK government have committed to investing £1.25 billion in electric arc furnace steelmaking at the Port Talbot site. This significant investment includes a generous grant from the UK Government amounting to £500 million. Notably, the Port Talbot project is projected to curtail direct emissions by a staggering 50 million tonnes over a decade. Additionally, this initiative involves a potential restructuring of Tata Steel’s balance sheet, which could lead to the elimination of ongoing cash losses in its UK operations and non-cash impairment of legacy investments.

Here’s a glimpse of what leading brokerages have to say about Tata Steel:

CLSA: CLSA has bestowed an “Outperform” rating upon Tata Steel, elevating its target price to Rs 145 per share from Rs 125. According to CLSA, the recent agreement with the UK government to restructure assets and implement operational and cost management changes is a highly positive development. However, CLSA emphasizes that the extent of value accretion for investors will hinge on the successful realization of cost savings.

Jefferies: Jefferies is notably bullish on Tata Steel, issuing a “Buy” recommendation with a target price of Rs 145 per share. Tata Steel’s collaboration with the UK government, involving an investment of £750 million by Tata Steel and £500 million by the UK government, is expected to result in improved profit margins compared to the existing setup. While this investment represents an opportunity to advance decarbonization, Jefferies also points out that it missed an opportunity to reduce exposure to high-cost, low-margin geographies.

Citi: Citi maintains a “Buy” rating for Tata Steel, setting a target price of Rs 140 per share. Citibank views the UK government’s support for Tata Steel’s EAF investment as a positive step toward ensuring continuity, sustainability, and environmentally friendly operations. However, Citi advises caution, suggesting that a full assessment of the impact of this development may require more clarity following union consultations.

Morgan Stanley (MS): MS has assigned Tata Steel an “Equal-weight” rating, with a target price of Rs 119 per share. The joint investment in a 3 million-tonne EAF plant at Port Talbot, coupled with additional policy support from the UK government, such as scrap availability, renewable energy sources, and support for green transition during the CBAM transitional phase, is perceived as a favorable move for the company’s future prospects.

In summary, Tata Steel’s strategic collaboration with the UK government has garnered positive endorsements from brokerage firms, with most recommending an ‘Overweight’ or ‘Buy’ rating. This development is poised to shape the company’s future trajectory, with a focus on sustainability and enhanced profitability.