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Strong India and EU ops drive all round performance; maintain Buy
* Tata Steel’s standalone EBITDA/t was down 13%/10% qoq/yoy to Rs13,845/t in Q4FY19, but ahead of our estimate of Rs2637/t. Its European ops reported Rs1696cr EBITDA which included Rs500cr toward the CERs and land sale. Adj. EBITDA/t rose 4.2%/15% yoy/qoq.
* The company continued to focus on debt reduction and has deleveraged the balance sheet by Rs6169cr during the quarter. During H2FY19, the net debt reduction has been to the tune of Rs9323cr. Tata Steel’s Kalinganagar expansion remains on track.
* Management continues to work with the EU antitrust on remedial package to alleviate concerns on capacity concentration to ensure TATA-TKA merger gets the approval. However, no incremental commentary on the same has been provided.
* Maintain Buy with a revised TP of Rs715 up from Rs 683 as we introduce FY21E estimates and roll over valuation to FY21 We revise Europe business EV/EBITDA multiple down to 5x retaining other multiples intact reflecting its volatile earnings.
India operations deliver strong performance
On a standalone basis, topline for Q4FY19 stood at Rs19,130cr, up 17%/11% yoy/qoq driven by strong sales volume growth of 18%/20%. Though the fall in headline ASP was Rs4,413/t on a qoq basis, the steel ASP was down by Rs3500/t, with the balance decline being attributed to the Ferro Alloys and Manganese Division (FAMD). However, strong focus on cost savings resulted in arresting the decline in EBITDA/t by Rs1,473/t to Rs13,845/t.
Merger with Tata Steel BSL – a step in the right direction
Tata Steel announced its merger with Tata Steel BSL. For every 15 shares of Tata Steel BSL, one share of Tata Steel shall be issued. At CMP of Tata Steel BSL of Rs32.60, the implied price per share of Tata Steel works to Rs489, which is a 4.3% discount to its closing price of Rs510.90. The merger will result in a 1.6% dilution of Tata Steel’s equity capital. We believe that the merger will result in a significant release of synergy benefits, tax benefits (unabsorbed depreciation/business losses), and reduction in corporate overheads.
Outlook and valuations; reiterate conviction Buy
We introduce FY21 estimates and roll over valuation to FY21. We value the standalone entity at 6.5x FY21E EV/EBITDA, maintain 6x FY21E EV/EBITDA for Tata Steel BSL, but reduce our valuation multiple for Tata Steel Europe from 6x to 5x, in line with our view on the quality of EBITDA differential between Indian operations and European operations. Reiterate Buy with a revised TP of Rs715. Maintain our thesis of improving EBITDA quality, deleveraging balance sheet and India growth to drive rerating. Key risks- (a) Weakening steel prices and dumping by China and rejection of the JV in Europe by EU Antitrust Commission are key the risks.
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