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FY22E Net Debt/EBITDA at <1x

Deleveraging (Rs 110bn in Q4FY21) aided by Rs 32.4bn of net proceeds from partly paid shares was the key highlight of Tata Steel Q4FY21 results. FY21E witnessed ~ Rs 200bn net debt reduction. Adjusted consolidated EBITDA of Rs139.3bn was largely inline, with ~ Rs 3bn from Tata Steel South East Asia which has been reclassified to “Continuing operations” from “Held for sale”.

Standalone EBITDA print surprised at Rs27828/te against Rs 26,500/te expected, while Tata Steel Europe (TSE) reported an inline US$66/te of EBITDA. Management has maintained its net debt reduction guidance of US$1bn + for FY22E.

This appears a bit conservative given the MTM earnings and despite accelerated capex. The extent of deleveraging is creating an upward bias for multiples for the entire sector, given significantly reduced loss probability. We maintain HOLD with a revised target of ~ Rs 1,020/share at 0.9x FY23E P/B – with significantly reduced loss probability, the increase in valuation band is only a matter of time in our view.

* Maintain HOLD.

Spot EBITDA at Rs38,000/te remains a key concern, especially when cycle duration has shrunk. The positive takeaways of Q4FY21 are: deleveraging – Rs 110bn of net debt reduction in Q4FY21 aided by Rs 32bn of proceeds from partly paid shares. Net pre export advances was largely flat QoQ at Rs 62.3bn. While capex is expected to pick-up, we expect a possible deleveraging of ~ Rs 300bn+ in FY22E – FY22E can be the defining year where ND/EBITDA approaches 1x before normalising to 2-2.5x. With near zero loss probability through cycle now, one can make an argument for expanding multiples.

* Indian operations reported a better than expected print.

Tata Steel India standalone adjusted EBITDA came in at Rs92bn (+37% QoQ, +151% YoY), ahead of I-Sec estimate of ~Rs87bn. EBITDA increased by ~ Rs 7,800/te QoQ to reach ~Rs 28,000/te (Higher than I-Sec estimate). Q4FY21 delivery volume increased 16%YoY as domestic deliveries increased 22%YoY; exports were at 11% of overall deliveries. Auto volumes increased 13% QoQ (highest ever quarterly auto volumes at 0.79mnte). This, helped realisations. Higher exports and lower auto volumes will define Q1FY22E, yet an EBITDA print of ~ Rs 37-38,000/te is possible. Combined India EBITDA reached Rs 26,309/te against Rs 18.931/te QoQ.

* Key takeaways for TSLP.

Steel production grew on the back of debottlenecking at steel melting shop and arcing – improving 7% QoQ and 19%YoY in Q4FY21 while FY21 production increased 11%YoY. TSLP increased alloy Wire Rod mix to 49% in FY21 vs. 37% YoY, and increased market share to 20% in FY21 vis-a-vis.12% YoY; supported by increased share in 2Ws segment. In the auto segment, domestic market share grew to 15% in FY21 vs. 12% YoY; maintained leadership position in CV with 38% market share, and registered 2x growth in auto component exports.

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