Tata Steel’s strong growth in India has always been punctuated by the drag from its European operations. The company is now positioned to improve profitability from Europe and India through a ₹11,500-crore cost take-out programme. The transition to green steel production in the UK in the next three years provides a strong upside optionality for the UK and even the Netherlands where discussions are ongoing. Capacity expansion in India is underway and the recently-announced import duties will arrest steel price decline.
The stock is trading at a 15 per cent discount to peers at 7.8 times FY26 EV/EBITDA, but is still a 18 per cent premium to its historical levels. Considering the growth and upside optionality tempered by premium valuations, we recommend investors accumulate the stock on dips. The stock trading at steel upcycle valuations may leave little margin for error and investors can accumulate at 15 per cent lower prices when market corrections present opportunities to price in safety. Trump’s recent announcement of 50 per cent tariff on steel should not impact UK operations which fall under the US-UK trade deal. But Netherlands has a significant exposure to USA which needs US-Europe trade deal to be resolved. The company can pass on the costs to US importers and provides a lever to manage the impact. Tata Steel India has minimal exposure to US markets.
The company has reported a revenue and PAT CAGR of -5 per cent and -37 per cent respectively between FY23 and FY25, owing to losses in Europe and lower steel prices. The company is poised for a turnaround with lower headwinds from the two factors.
Cost take-out
The cost take-outs are spread across India (₹4,000 crore), the UK (₹3,000 crore) and the Netherlands (₹4,500 crore). The Indian arm will focus on low capex, quick turnover projects (worth ₹500 crore) to improve conversion costs by about ₹1,000 per tonne compared with FY25 EBITDA per tonne of ₹13,420. The programme will also focus on operating KPIs, employee productivity and supply chain optimisation that will consolidate efforts in the Netherlands and the UK as well. The UK operations are already in the middle of a cost take-out programme having lowered costs by about £170 per tonne in the last two quarters by improving purchase costs of substrate and reducing corporate overhead costs. The UK operations have reduced employee count from 8,000 to 5,000 in the last year with further scope to lower costs.
While the final extent of cost improvement will have to be monitored, at the current juncture when steel prices are rebounding from lows and raw material costs continue to be lower (coking coal and iron ore), the profitability will be on a growth path complemented by any degree of success in cost take-out.
Segment scope
In India, Tata Steel Kalinganagar plant has commenced operations in H2FY25 from the expanded 8-million tonnes per annum (mtpa) plant, which was earlier at 3 mtpa. The ramp up is ongoing and production is expected to increase by 2 mtpa in FY26 (FY25 sales at 21 mtpa for Tata Steel India). This green-field project will be the largest and lowest cost producer of steel in India.
Post this expansion, the focus will turn to Neelanchal plant, which Tata Steel aims to expand from 1 mtpa currently to 5 mtpa – a longer-term project. The pre-expansion regulatory legwork, including environmental and other processes, are underway. The company aims to spend 75 per cent of the intended ₹15,000-crore consolidated capex in India in FY26. This includes downstream and efficiency projects apart from headline capacity expansion.
Steel prices are expected to supplement the capacity expansion from hereon. Impacted by Chinese steel imports, the steel prices have been on a declining trend; -5/-11 per cent year-on-year decline in FY24 and FY25. With the imposition of steel import duties, the price decline is expected to stop and the prices in Q1FY26 may increase 5 per cent as well. The operating costs have declined -7/-10 per cent in the last two fiscals. If the commodities stay the course, the higher operating leverage, higher steel prices and lower conversion costs should support margin expansion.
The UK and Netherlands
The European arm is focused on decarbonisation. The UK plant has decommissioned two blast furnaces (which use coal) and are in the process of constructing a 3-mtpa electric arc furnace or EAF (uses scrap steel and cleaner energy sources), which should be ready in next three years. The project cost of £1.25 billion will be funded by the UK government (£500 million) and the company.
In the interim, the company is purchasing the substrate from India, the Netherlands and other sources to maintain its client base. This caused the drag on profitability along with the employee costs. As mentioned, the company is a on a cost-cutting phase and expects to reach EBITDA break-even in FY26-end.
The Netherlands operations reported 17 per cent year-on-year growth in steel sales in FY25, as production is back online after relining its blast furnace. Further volume growth from the capacity can be expected in FY26 as well. Both the UK and Netherlands are expected to benefit from steel price increases in FY26 similar to Indian conditions. The drag on profitability due to maintenance will also cease, returning to higher volumes and higher steel prices. The EBITDA per tonne is expected to recover from flat levels in FY25 to ₹8,000 per tonne in FY26. Under consideration is a plan to convert one of the two blast furnaces in the Netherlands to EAF or associated plant by 2030, again with the support of the Dutch government considering a cost outlay similar to the UK project. The discussions and due diligence is ongoing with the government.
While the decarbonisation projects are on a longer timeframe, Tata Steel with the initial groundwork will be amongst the last ones standing in Europe with a green steel profile. The steady progress in India, though in coal-based plants, is beginning to be supplemented with a 0.85-mtpa EAF plant nearing completion in the next one year.
Published on May 31, 2025
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