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UBS downgrades Tata Steel to ‘sell’ on deleveraging concerns

The stock has underperformed the Sensex which is up 13 per cent so far in 2019.

ET Bureau|
Dec 03, 2019, 07.59 AM IST
UBS has downgraded Tata Steel to ‘sell’ from ‘buy’ and slashed its target price on the stock to Rs 360 from Rs 675 as it expects weak India earnings to delay deleveraging. The brokerage expects a de-rating from current levels given a domestic demand recovery is yet to materialize and European operations are still struggling with a subdued demand environment.

“Despite previous guidance to reduce debt by $1billion per year, a subdued domestic environment and weak overseas operations in H1 FY20 (April-September) led reported net debt to increase from Rs 95,000 crore in March 2019 to Rs 1,07,000 crore in September 2019," said UBS in a note.

The recently concluded stake sale of NatSteel Vina (Vietnam) is positive but the brokerage remains concerned about divestment timeline in Thailand.

Shares of Tata Steel ended down 1.5 per cent at Rs 420.80 on Monday, and has declined 19.4 per cent so far this year.

The stock has underperformed the Sensex which is up 13 per cent so far in 2019. Bloomberg data shows most analysts tracking the stock have a buy rating on it — 21 of the 30 analysts tracking the stock have a ‘buy’ recommendation on Tata Steel while four analysts have a ‘hold’ rating and five analysts have a ‘sell’ rating.

Tata Steel has taken some steps to deleverage which includes divestment of South East Asia business, recalibration of FY20 capex downwards by 20-25 per cent, measures to release Rs 1,500 crore-Rs 2,000 crore in working capital, and continued cost reduction to maintain a robust Ebitda/tonne for India operations, said UBS.

However, the brokerage has factored in modest recovery in domestic demand, challenging environment in Europe, delay in South East Asia business divestment and increasing leverage.

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