Cost rationalisation, efficiency capture and cash preservation
Key takeaways from Tata Steel Q4FY20 conference call are:
i) FY21 sales volumes should be similar to FY20 on the back of opportunistic exports;
ii) capex has been significantly curtailed – FY21 capex will be slashed >50% YoY to Rs40bn-50bn;
iii) efforts are on to undertake cost and process efficiencies in Europe, where employee costs have been reduced by GBP60mn over the past six months;
iv) group debt maturity is <US$250mn each year over FY21/FY22; and
v) Tata Steel Mining can grow into something more interesting given an underlying motive to create a more lean cost structure in India mining. Maintain BUY with a target price of Rs594/share.
* Export trend. Q1FY21 should see utilisation at 60% and export of 50% of output. Management expects Q2FY21 exports at 30% of volumes. Exports should come back to 15% of output with restoration of domestic demand. While exports are profitable, there will be margin compression. Export destinations are largely Southeast Asia and China. Apr’20 saw large exports of semis to China along with hot rolled coils. Going forward, exports of semis are expected to decline. There are sectors in India showing demand growth with rural market demand continuing to be strong; Tata Steel’s distribution channel is helping capture the same.
* No one-off in Europe profitability. Lower material costs of GBP80/te, which Tata Steel Europe realised with a lag, helped increase margins QoQ, net of lower revenues (GBP24/te) and higher other expenses. Also, in Q4FY20, there was purchase of carbon credits; excluding which the operating performance in Europe would have been better than reported. Higher iron ore prices will flow through in Tata Steel Europe financials with a lag of 3-4 months.
* Tata Steel Mining Ltd – the gradual start of something big? Ferrochrome is a Rs8bn-10bn EBITDA division and, under the new subsidiary, Tata Steel will bring back chrome ore mining in a more outsourced manner. This has implications on costs. Tata Steel Mining is not much of a commercial mining enterprise (strategic priorities can firm up in future if that makes commercial sense); even if it does go commercial, it is currently focused on iron ore rather than thermal coal. The cost model will be new, so that when the iron ore mines come up for auction, their cost structure would be competitive enough to retain them. Tata Steel Mining can be that eventual business pivot– since at least its iron ore mining plans are big. Those operations should be strategically delinked from steel operations within the group.
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