Tata Steel’s Q2FY21 consolidated performance was better than our estimates on all fronts. For Q2FY21, sales volume for Indian operations were at 5.05 MT (up 72% QoQ, 22% YoY) while sales volume from European operations were at 2.27 MT (down 1% YoY, up 15% QoQ). Consolidated topline came in at | 37154 crore (up 7% YoY, 53% QoQ), higher than our estimate of | 34768 crore. Consolidated EBITDA was at | 6111 crore while adjusted EBITDA was at | 5425 crore, (our estimate: | 4495 crore). Standalone operations reported EBITDA/tonne of | 12861/tonne (our estimate: | 12000/tonne) while European operations reported negative EBITDA/tonne of US$27/tonne (our estimate of negative EBITDA/tonne of US$35/tonne). PAT from continuing operations was at | 1635 crore.
Discussion starts for potential sale of Netherland plant…
The company has initiated the process to separate Tata Steel Netherlands, Tata Steel UK and will pursue separate strategic paths for the Netherlands, UK business in future. Tata Steel has entered into negotiation with SSAB, the Swedish company, to sell its Netherland facility including Ijmuiden steelworks (time frame of six to nine months to complete, if the potential transaction happens). The company is committed to deploying proceeds of any strategic restructuring towards additional deleveraging of the balances sheet. Tata Steel will continue to own and operate the UK business. The company has continued its discussion with the UK Government on potential measures to safeguard the long-term future of Tata Steel UK and is also reviewing all options to make the business self-sustaining without need for any funding support from Tata Steel India in future.
Healthy outlook for H2FY21….
For the Indian operation, on the back of a series of price hikes, coupled with improvement in product-mix, the blended realisation for Q3FY21 is likely to be sequentially higher by | 4000-5000/tonne QoQ (as compared to Q2FY21). Furthermore, coking coal prices for Indian operations are expected to be lower by US$5-10/tonne QoQ. European operations EBITDA/tonne is also likely to improve in H2FY21 on the back of increase in gross spreads. For European operations, average gross spreads in Q2FY21 were at €170/tonne, which is expected to increase to ~€200/tonne in Q3FY21 (spot gross spreads at Europe is ~€225/tonne).
Valuation & Outlook
On the back of increase in realisations, we expect a healthy H2FY21 for the company. We model consolidated EBITDA margin of 12.9% for FY21E and 15.6% for FY22E (H1FY21 consolidated EBITDA margin was 10.8%). The debt repayment drive also augurs well. We value the stock on SoTP basis and arrive at a target price of | 625. We upgrade the stock from HOLD to BUY recommendation.
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