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TKA JV on track, deleveraging to continue; reiterate Buy
* Media reports suggest further extension of the EU Anti-trust Commission’s deadline for the Tata Steel-ThyssenKrupp JV from 13th April 2019 to 9th June 2019. The previous deadline was 29th April 2019.
* ThyssenKrupp and Tata Steel have both offered mills for divestment to mitigate concerns of the Commission regarding concentration of capacities with the JV Company. This, in our view, reiterates their commitment toward consummating the JV.
* We expect the JV to get clearance from the EU Anti-trust Commission by 1QFY20. Further, we also expect the closure of the sale of the South East Business transaction in 1QFY20, post which the company will largely comprise Indian operations.
* Improving visibility on the JV leads us to increase our EV/EBITDA valuation multiple for the standalone entity from 6x to 6.5x FY20 estimates. Maintain Buy rating; revise target price from Rs555 to Rs683.
JV deadline extended further; JV partners offer solutions to mitigate concerns
As per media reports, the EU Anti-trust Commission has extended the deadline for Tata SteelTKA JV from April 13 to June 5, 2019. This is on account of both Tata Steel and TKA offering options to divest certain mills to meet the Commission’s concerns regarding concentration of capacities in the JV. The Commission had raised concerns over competitive concentration in three areas: 1) packaging steel; 2) automotive steel; and 3) electrical steel as per news agencies (Reuters). The remedies could be: 1) Tata Steel offering to divest portions of the Port Talbot plant in Britain, consisting of packaging, automotive and electrical steel and 2) TKA offering its Hot Dip galvanizing plant at Galmed SA in Spain for divestment.
Tata Steel to focus on home market
The company is now focusing back on its home market which is its stronghold. After having struggled with the acquisition of Corus over the last 10 years, the divestment of the business should improve the EBITDA quality of the consolidated entity significantly. Our thesis of re-rating of the stock is driven by: 1) Tata Steel exiting the European and SEA businesses, which have a weak EBITDA profile; 2) it is bringing back the focus to the Indian market, the fastest-growing steel market among the major economies globally; 3) 100% integration with iron ore and partial integration with coking coal supporting the strong EBITDA/t profile in India, while a strong product portfolio of value-added products and brand premium supporting EBITDA expansion.
Outlook and valuations
With the big ticket M&A already behind us, the cash generated from Indian operations should downtrend, lowering the leverage ratios. We maintain a positive outlook on the company and now value the Parent Company at 6.5x FY20E EV/EBITDA vs. 6x previously and other businesses at 6x FY20 estimates. We maintain our Buy rating and revise our TP from Rs555 to Rs683. Key risks are: 1) any delay in JV approval; and 2) lower domestic steel prices.
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