A challenging year ahead
Adverse volume mix to impact near-term margin
* Tata Steel’s (TATA) 4Q EBITDA rose 28% QoQ to INR46.5b and surprised positively led by improved performance in Europe and Bhushan.
* Near term earnings outlook is weak due to lower domestic demand necessitating higher exports which adversely impacts EBITDA. Moreover, leverage remains discomforting at 8x of FY21 EBITDA. Given the challenges in Europe, we cut our FY21/22 EBITDA estimates marginally and maintain our Neutral rating on the stock.
Tata Steel BSL and Europe drives beat
Consol. EBITDA increased 28% QoQ (-43% YoY) to INR46.5b (our estimate: INR40.4b) in 4QFY20 due to improved profitability in Tata Steel BSL and Europe. Consolidated sales volumes stood at 6.5mt, down 11%/14% QoQ/YoY. Other income was substantially higher at INR13.2b (2.7x YoY, 14.x QoQ), due to one-off gains. Consol. PAT loss stood at INR13.3b vs loss of INR11.9b in 3QFY20, however, adj of exceptional item related to impairment of noncurrent assets, Adj PAT stood at INR13.8b (our est loss of INR3.5b).
* Standalone: Reported EBITDA declined 3% QoQ to INR36.5b (-27% YoY), in-line with our estimate. On adjusted basis, EBITDA was up 10% QoQ as 3QFY20 had a one-time cost reversal of INR4.8b. EBITDA/t stood at INR12,538, up 14% QoQ (-9% YoY) (our est.: 11,353/t) due to 10% QoQ higher realisation (INR48,837/t, +4% higher than our est.). Sales volumes declined ~15% QoQ/19% YoY to 2.91mt (our est: 3.08mt). Adj. PAT stood at INR13.2b, down 9% QoQ (-47% YoY). On a reported basis, however there was a PAT loss of INR4.4b due to impairment of INR20b on investments in subsidiaries/affiliates.
* Tata Steel Europe (TSE): Tata Steel Europe reported EBITDA of INR650m (- 96% YoY) vs loss of INR9.6b in 3QFY20 (Our est.: EBITDA loss of INR3.4b). Volume declined 7% YoY to 2.39mt (+2% QoQ) and EBITDA/t stood at USD4/t. Improvement in EBITDA was due to better spreads led by lower raw material costs.
* Tata Steel BSL: Tata Steel BSL reported EBITDA of INR7.7b (est: INR4.5b), up 170% QoQ (flat YoY). EBITDA/t improved to INR7,908/t (+260% QoQ, +15% YoY) led by 9% QoQ higher realisation (INR43,609/t).
* FY20 OCF/ FCF stood lower at INR202b/ INR97.8b vs INR253b/ 162b in FY19 respectively.
* Net-debt rose by INR99b YoY to INR1,071b vs INR972b in FY19 (flat QoQ).
* Capex (excl. acquisition) stood at INR104b in FY20.
* FY20 Rev/EBITDA/Adj. PAT stood at INR1,398b/ 175b/ 13b, down 11%/ 40%/ 87% YoY respectively
* Steel demand in India is improving in rural market and areas not hit by COVID. Demand from Govt projects is improving, however, demand from auto segment is likely to improve only in 2HFY21.
* Tata Steel guides for achieving flattish (YoY) sales volumes in FY21 (12.3mt in FY20). Currently, it is operating at ~80% capacity utilization.
* Debt-maturities for FY21/FY22 stands lower at ~USD250m each.
* FY21 capex is curtailed to INR40-50b with 50:50 split between India and Europe business (FY20 Capex: INR104b). Most of the capex would be on safety and sustenance projects.
* Domestic realisations have declined by just INR500/t during 1QFY21, however, adverse mix due to higher exports (50% of volumes) would lower blended realisation by INR4,000-5,000/t QoQ in 1QFY21.
Valuation and view
* While volumes and margins would be impacted in FY21 due to weak domestic demand and adverse sales mix, we expect them to recover to normal levels in FY22.
* Tata Steel Europe however is expected to remain a drag on overall profitability with EBITDA loss expected in FY21 and PAT loss in FY22.
* Despite curtailing growth capex, we expect net-debt/ EBITDA to remain high at 8.1x in FY21 and 4.7x in FY22.
* Maintain Neutral with a TP of INR328/sh (based on SOTP)
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