Analysts at most brokerages have raised their price targets on Tata Steel shares in reaction to the company's joint investment plan with the UK government to build the country's largest steelworks in Wales. The move, which is estimated to reduce the steel maker's losses from Europe, has removed an overhang for the stock, said analysts.
«We believe the recent developments related to Tata Steel UK will serve as a favourable catalyst for the stock price as it eliminates a key overhang for Tata to provide cash support from India operations to TSUK (Tata Steel UK) in the long term,» said Ravi Sodah, analyst at Elara Capital.
Tata Steel shares, which gained 12% in the last month, ended 1.5% lower at ₹130.4 on Monday.
While Tata Steel and the UK will invest £1.25 billion — including a government grant of £500 million — to build an Electric Arc Furnace (EAF) steel plant at Port Talbot — a town in Wales, the existing facility, which is nearing the end of its operational life, will be restructured.
Tata Steel in the UK has been lossmaking.
«The finalisation of £500 million grant from the UK govt for a £1.25bn EAF (Electric Arc Furnace) facility at TSUK (Tata Steel UK), removes a key overhang for Tata Steel,» said brokerage IIFL's analysts Anupam Gupta and Mudit Bhandari in a client note. «This is because cash support from India operations (£163 million in FY23) fades incrementally, during the transition.»
Analysts said the step to replace the existing facility with a new one would help the company's earnings.
«We believe the proposal if approved could sustainably reduce UK losses and is a step in the right direction,» said Kotak Institutional Equities' analysts Sumangal Nevatia and Siddharth Mehrotra in a note to clients.