Published on 27/10/2020 9:37:51 AM | Source: ICICI Direct

Hold Tata Steel Ltd For Target Rs.450 - ICICI Direct

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Standalone operations EBITDA/tonne to inch up…

Tata Steel reported subdued Q1FY21 results wherein consolidated topline came in line with our estimate while consolidated EBITDA was notably lower than our estimate. The EBITDA/tonne of both Indian, European operations came in lower than our estimate. Standalone operations reported sales volume of ~2.1 million tonnes (MT). European operations reported steel sales of 2.0 MT, marginally higher than our estimate of 1.9 MT. Tata Steel BSL reported sales volume of 0.7 MT (higher than our estimate of 0.65 MT). Consolidated topline was at | 24289 crore (down 32% YoY, 28% QoQ), largely in line with our estimate of | 23010 crore. Consolidated reported EBITDA was at | 506 crore while adjusted EBITDA was at | 1038 crore (notably lower than our estimate of | 1634 crore). For the quarter, the company reported exceptional gain (net) of | 58 crore. Subsequently, on a consolidated basis, the company reported a net loss of | 4609 crore.


Healthy improvement at operating level…

Operating level of Tata Steel Indian operations recovered to 90% by end June 2020 and has since then increased further to 95%, catering to both domestic and export customers. With the improvement in the domestic market, Tata Steel has been reducing its exports ratio. In Q1FY21, for the Indian operations, of total sales volume ~50% was exported. Contribution of export volumes in overall volumes is expected to fall to 25% in Q2FY21. The company has indicated that the price outlook in both export and domestic market has witnessed an improving trend on an MoM basis. Furthermore, it also indicated that current quarter demand has been much better than a typically slow monsoon quarter in the past.


On standalone basis, Q2FY21 likely to be better than Q1FY21

Tata Steel reported subdued consolidated performance for Q1FY21, primarily on the back of Covid-19 related concerns. With regard to standalone Indian operations, while blended realisations were muted in Q1FY21, they are expected to improve Q2FY21. Blended realisations are likely to be up | 3000/tonne in Q2FY21 (vs. Q1FY21 average). Also, for domestic operations, prices of coking coal are expected to fall by US$5/tonne in Q2FY21 vs. Q1FY21, auguring well for the company.


Valuation & Outlook

Tata Steel reported a muted consolidated performance in Q1FY21. At the consolidated level, ~| 2000 crore of costs was under absorbed due to lower volumes and have been charged to the P&L, thereby impacting its operating performance during the quarter. However, going forward, we expect Tata Steel standalone operations’ Q2FY21 performance to improve (from Q1FY21 levels), on the back of higher realisations QoQ, lower coking coal costs and QoQ higher domestic sales volume. We value the stock on SoTP basis and arrive at a target price of | 450. We maintain our HOLD rating on the stock.


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