Strength in outlook overshadows suboptimal Q1
Tata Steel has reported adjusted consolidated EBITDA of Rs10.4bn against consensus of Rs12.9bn. While standalone numbers were broadly in-line, Tata Steel Europe (TSE) disappointed with EBITDA loss of US$42/te (expected EBITDA loss of US$6/te). TSE EBITDA has gains on account of sales of emission rights and wage support from European and UK government, while exchange fluctuations impacted. Lower volumes in standalone operations (down 30% YoY) impacted EBITDA. Management did highlight Rs20bn in costs remain unabsorbed due to lower volumes i.e operating leverage impact. FCF generation has been very impressive at Rs7bn for the group broken into Rs16.8bn in India and Rs9.8bn overseas. This has helped maintain net debt QoQ. Tata Steel remains our top pick, as earnings tailwind (domestic price increases + impending price increase in Europe) and elevated net debt to market cap augurs well. Maintain BUY.
* Indian operations reported an in-line print. Q1FY21 sales volumes in India declined 27% QoQ due to nationwide lockdown amid Covid-19 outbreak; exports were significantly ramped to 1.46mnte by tapping new markets. Auto volumes fell to 0.08mnte from a quarterly run-rate of 0.5mnte. Crude steel production decreased by 37% QoQ as capacity utilisation was curtailed in Apr’20 due to the lockdown, before gradually ramping back from mid-May’20 onwards. With relaxation in lockdown measures, overall deliveries in June’20 improved significantly to ~115% of FY20 average monthly overall deliveries; domestic deliveries in Jun’20 reached ~75% of FY20 average monthly domestic deliveries. Exceptional items in Q1FY21 primarily include gain in fair valuation of preference shares held at Tata Steel BSL amounting to Rs20.3bn
* European EBITDA disappointed. Oversupply in European steel markets led to adverse product mix and thereby, fall in revenue and profitability. Continuous improvement from transformation programme, careful cost management and wage support from European and UK governments helped limit the EBITDA loss at £67mn. Tata continues to engage with European and UK governments to seek short and long-term support. Q1FY21 EBITDA has been supported by i) carbon credit sales and ii) wage support from EU and UK governments while forex has created a negative contribution of ~US$13/te as per our calculation. Steel demand recovery in EU is slower; overall 2020 demand is expected to decline by about 16%.
* Maintained flat net debt QoQ; maintain BUY and top pick. Q1FY21 was exceptional and Tata fared poorly vis-à-vis peers in its cost control efforts and faced the highest adverse impact of mix deterioration due to high dependence on autos. TSE remains as unpredictable as ever, yet tailwinds exist in the form of impending price hikes in the region. Growth capex has been curtailed. With reviving domestic prices, improved mix, resilient iron ore prices and sanguine balance sheet management can help Tata meaningfully outperform peers (JSWS, JSPL).
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