Published on 11/09/2019 11:14:24 AM | Source: Prabhudas Lilladher Ltd

Reduce Tata Steel Ltd For Target Rs.350 - Prabhudas Lilladher

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Europe does the damage; De-rating to aggravate

Tata Steel (TATA) reported consolidated EBITDA reported 6%/5% below ours/consensus estimates. Standalone operations posted EBITDA/t in line with expectation at Rs13,150 (PLe:Rs13,180), down 5% QoQ/23% YoY. Tata Steel Europe (TSE) posted disappointing earnings with 95% QoQ/96% YoY fall in EBITDA at US$9mn (PLe:USD$125mn). Operational issues and sharp fall in spreads impacted TSE’s earnings. Due to weak margins in TSE, we cut our EBITDA/EPS estimates for FY20E by 4%/18%.

Despite sharp increase in iron ore prices, steel prices softened by US$20-25/t in last couple of months. In spite of serious trade restrictions imposed on its imports by various countries, China acted in a disciplined manner with reduced export intensity and stable domestic demand. On the contrary, RoW (ex-China), the so called disciplined and earnings focused markets witnessed sharp contraction in demand and prices. This signifies structural downturn in steel sector on the backdrop of underlying weakness in RoW’s demand and peaked-out stimulus fed temporary acceleration in Chinese demand. Given the overleveraged B/S (Net debt/EBITDA of 4.5x) and weak earnings outlook, we reiterate Reduce with TP of Rs350, EV/EBITDA 5.5x FY21e.

* Margins in line with expectation in domestic operations: Volumes fell 16% QoQ (+1.3% YoY) to 3.0mnt (PLe:3.0mn) t. Blended realisations rose 1.7% QoQ to Rs52,535, tad below our estimate of Rs52,670. Due to lower RM cost, cost/t came marginally below our estimate at Rs40,315 (PLe:Rs40,970); up 0.7%/Rs280 QoQ. EBITDA fell 20% QoQ (↓22% YoY) to Rs39.6bn (PLe:Rs40bn). Due to 67% fall in other income, Adj PAT fell 37.4% QoQ (↓38.3% YoY) to Rs15.7bn (PLe:Rs18.9bn).

* Depressed earnings in TSE led the miss at consol level: TSE volumes fell 12% QoQ (↓7.8% YoY) to 2.3mn (PLe:2.5mn) t. Due to weaker than expected spreads, operational issues and provision of £16mn for carbon emissions, TSE’s EBITDA/t fell to US$4 against US$66/US$100 in Q4FY19/Q1FY19. Hence, Consolidated EBITDA came below our estimates at Rs53.8bn (PLe:Rs56.9bn), down 28% QoQ (↓15% YoY). EBITDA increased by Rs1.7bn due to adoption of AS116 related to accounting of operating leases. Adj. PAT fell 70% QoQ (↓72% YoY) to Rs7.0bn (PLe:Rs10.8bn).

* Key highlights of con-call:

1) Realisations to be lower by Rs3,000/t QoQ due to fall in domestic prices and higher share of exports

2) Debt increased by 9% QoQ to Rs1.03tn due to adoption of AS116 and acquisition of Usha martin

3) Signed MoU with Synergy Metals & Mining PE fund to divest 70% stake in Tata Steel Thailand

4) Owing to weak market conditions and high debt, company reduced FY20 capex guidance (excluding TSE) of Rs80bn by 25% with slowing of capex on 5mtpa Kalinganagar phase-2 despite strong payback and scale benefit of the project

5) Spent Rs24.5bn on capex in Q1FY20

6) Will spend US$300mn on maintenance capex in TSE

7) TSE's Iron ore cost would increase by 12% QoQ to US$95/t in Q2FY20e

8) Coking coal cost would be lower by US$5/t QoQ in Q2

9) Maintained guidance of US$1bn for debt reduction in FY20 through calibrated capex and rationalization of working capital.


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