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Strong quarter; Outlook promising

Tata Steel is a leader in the global steel industry with operations spanning over 26 countries with key operations in India, Netherlands and United Kingdom. Tata steel primarily caters to customers in automotive, construction, engineering, energy and power sectors.

* Consolidated revenue grew 6.8% QoQ (+109.5% YoY) led by favorable spot prices and improved realizations. Exports rose 16% of total sales compensating softness in domestic markets.

* EBITDA grew 13.8%QoQ as margin expanded 180bps QoQ to 30.2%, on higher steel prices and beneficial inventory changes.

* We expect robust domestic demand recovery post pandemic accompanied by further deleveraging efforts and efficient capital allocation ensuring liquidity. We remain positive on the stock and reiterate our BUY rating on the stock with a revised target price of Rs. 1,745 using SOTP valuation.

European business helps growth momentum

Revenue for Q1FY22 rose 6.8% QoQ to Rs. 53,372cr (+109.5% YoY) due to growing European business (+12.6% QoQ to Rs. 19,441cr) with elevated spot steel prices. Domestic operations was backed by improved prices and realization offsetting lower deliveries upon partial lockdowns impacting steel consuming sectors with temporary shutdowns. Production was at 7.88mn tons (vs. 8.02mn tons in Q4FY21 and 5.54mn tons in Q1FY21) mildly impacted due to seasonality and second wave of COVID. Resultantly, India revenue fell 1.9% QoQ to Rs. 20,798cr (+122.7% YoY upon low base), as apparent steel consumption shrank 14.8% QoQ. Bamnipal Steel revenue climbed up 7.3% QoQ to Rs. 7,858cr, while Other Indian operations surged 7.9% QoQ to Rs. 4,112cr.

EBITDA unharmed on favorable pricing

Company recorded highest ever quarterly consolidated EBITDA of Rs. 16,111cr (+13.6% QoQ) with a margin of 30.2%, up 180bps QoQ with reduced other expenses (- 2.9% QoQ) and favorable inventory changes as a % of sales (+8.9pps YoY, +2.9pps QoQ) partially offset by higher raw material costs (+23.5% QoQ) and staff costs (+5.0% QoQ). Resultantly, net profit rose to Rs. 8,097cr vs. Rs. 4,417cr loss in Q1FY21.

Key concall highlights

* The company has accelerated capex allocation for expanding Kalinganagar – already spent Rs. 2,000cr; Expected capex for FY22 is at Rs. 10-12kcr.

* 6 MTPA pellet plant and 2.2mn CRM complex are expected to be commissioned by H1FY22.

* Pioneered launch of India's first rate ferrous scrap product “Tata Ferroshot” – substitute for high quality scrap & coke.

* Global steel demand is expected to rise by 5.8% in CY21 upon economic recovery and progressive COVID-19 vaccination across regions.

* Volume guidance for Domestic and Europe businesses at ~1mn ton for the year.

* Q1FY22 debt repayments is at Rs. 5,894cr while gross debt dropped to Rs. 84,3237cr and net debt to Rs. 73,973cr; FCFs amounted to Rs. 3,553cr.

Valuation

Company aims to focus on expansion by doubling production capacities led by improved capex to gain further traction in domestic operations. Solid financial position/free cash flows coupled with deleveraging benefits to supplement liquidity sustenance and strengthen future prospects. Hence, we reiterate our BUY rating on the stock with revised target price of Rs. 1,745 using SOTP valuation.

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