Europe’s underperformance drives miss
Margins to compress further Consol.
EBITDA declined 28% QoQ (-17% YoY) to INR53.8b (our estimate: INR59b) in 1QFY20, led by lower volumes and margins, particularly within the EU business. Adj. PAT was down 72% QoQ/YoY to INR6.7b (our estimate: INR13.4b).
* Standalone: EBITDA/t was down 7% QoQ to INR12,764 due to lower realization. Realization is expected to decline by ~INR3,000/t in 2Q before likely recovering in 2H. EBITDA was down 20% QoQ to INR39.5b.
* TSE: EBITDA/t declined by USD90 QoQ to USD4, as instead of carbon credit gain of USD30/t, there was a cost of USD10-15/t in the quarter. TSE has exhausted its credits and instead will have to buy credits from the market. Fall in steel spreads, weak demand and shutdown also impacted margins. Spreads are likely to remain weak.
* Bhushan: EBITDA/t improved 32% QoQ to INR9,128/t owing to a better mix (volumes down 25% QoQ to 860kt). EBITDA was flat QoQ at INR7.8b.
Margins to compress further; Maintain Neutral
* Margins will be under pressure over the near term due to slow demand in India and EU, and further compression of spreads in EU. The impact of carbon cost will be structural in EU business, in our view. We cut our FY20/21 consol. EBITDA estimate by 10%/4% to INR240b/INR267b to factor in lower margins.
* Management maintained the net debt reduction target of ~USD1b in FY20. It has cut capex by ~20% v/s the earlier target for FY20, and expects working capital release to support cash generation. The South-East Asia JV deal with HBIS has been called off. At the same time, it entered into an MoU with another party, but timelines and valuations remain uncertain. Ongoing synergies, higher output and ramp-up of captive mines in the recently acquired Usha Martin and Bhushan steel business are likely to partially support margins. We cut our TP to INR422 (based on SOTP). Maintain Neutral.
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