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Sustainable TSE earnings key to stock performance

Tata steel reported consol. EBITDA of INR143bn, higher than JMfe of INR121bn. India businesses – standalone incl. BSL and Longs reported a sequential dip in earnings led by higher coking coal prices while TSE reported an increase of USD121/t QoQ to USD366 EBITDA/t. The company delivered a PAT of INR78bn. Net debt during the quarter increased to INR545bn (up INR35bn) on account of increase in working capital due to volatility in commodity prices. However, the company remains committed to its annual deleveraging target of USD$1bn. The company also concluded the NINL acquisition during the quarter and expect the acquisition to drive growth of long products business

Key takeaways from the call are – 1) realisations to trend lower in 2QFY23 for India and Europe operations 2) coking coal cost likely to be lower by USD40/t QoQ for India operations 3) margin compression expected in 2QFY23 4) volumes for 2QFY23 expected to be higher by 0.5 mn tons sequentially 5) gas availability in Europe unlikely to impact operations 6) gas price in Europe trending higher however company is hedged upto 75% for the next 3 quarters. The company remains confident on resuming NINL blast furnace within 3 months of acquisition while coke oven may require 6 months. Tata steel expects to increase capacity to 40 mn tons by FY30, with immediate focus on Kalinganagar and NINL. Major capacity additions are expected to be organic. This will result in lower capex intensity and attractive payback period. We continue to prefer Tata Steel in the ferrous space. Maintain BUY.

* Coking coal prices impact India margins: Tata Steel India standalone (incl. BSL) EBITDA came in at INR83bn implying a blended EBITDA/t of INR21.4k, a sequential dip led by increase in coking coal prices. PAT stood at INR49.1bn (vs. INR74.5bn in 4Q22). TSLP reported a 10.8% QoQ increase in revenues to INR19.9bn, primarily driven by higher realisations and product mix. EBITDA loss came at INR680mn on account of higher coking coal & DRI coal prices and one-time NRV provision on Coking coal and Iron ore

* Europe delivers a stellar quarter amidst high realisations: Tata Steel Europe reported EBITDA of USD783mn as against EBITDA of USD578mn in the previous quarter (up 35.4% QoQ). EBITDA/t stood at USD366 in 1Q as against USD245 in 4Q on account of significant margin expansion during the quarter

* Focus on deleveraging to help achieve target debt levels: Growth capex towards 5mtpa Kalinganagar expansion is progressing well. The company expects to commission 6MTPA pellet plant at Kalinganagar in 3QFY23 followed by 2.2MTPA CRM expansion in 4QFY23 and 5MTPA BF expansion is expected by the end of FY24. Commissioning of Pellet plant at Kalinganagar will help in cost reduction. Net debt during the quarter increased to INR545bn (up INR35bn) on account of increase in working capital due to volatility in commodity prices. The company concluded the NINL acquisition during the quarter and expect the acquisition to drive growth of long products business. The company remains committed to its annual deleveraging target of USD$1bn. We believe a balanced strategy towards de-leveraging, growth and shareholder returns bodes well for the company. Maintain BUY.

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