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Q3FY22 Result Highlights

* Steel prices moderated across key regions including the western markets but remain elevated compared to an year ago. Raw material prices corrected but remain volatiledueto supply sideissues.

* Spot spreads softened as the move in raw material prices is yet to translate into steel prices, partly due to spread of Omicron.

* China’s steel production continued to decline amidst production curbs. Chinese steel exports in second half of 2021 were lower than first half as export spread and domestic spreads converged.

* Crude steel production increased by ~2% QoQ and ~4% YoY. Domestic deliveries were higher by ~2% QoQ and during the first nine months of the financial year, domestic deliveries have witnessed a steady pickup driving improvement in product mix.

* Sales volume in Branded Products & Retail (BPR) and Industrial Products & Projects (IPP) improved QoQ. Automotive segment sales remained flat QoQ despite auto production being down 9% QoQ.

* Neelachal Ispat Nigam ltd has a steel making capacity of 1 MnTPA with land bank of 2,500 acre land bank. The company also has a captive Iron ore mine of 100 mn ton. This acquisition will help to ramp up Long products business with a significant growth in infrastructure Pan India and retail housing growth in semi urban India. The company aims to expand it to 10 MnTPA in long run.

* Deliveries: Lower volumes in India on account of moderation in exports partly offset by increase at Europe.

* Revenues: Improved as increase in realization across key entities and slightly higher deliveries at Europe more than offset lower deliveries in India.

* Raw Material cost: increased primarily due to higher Coking Coal prices across key entities.

* Change in inventories: inventory value increased primarily due to higher prices across geographies; inventory volume also increased at key entities.

* Other expenses: broadly similar as higher energy expenses in Europe were offset by the decrease in royalty related charge at Tata Steel Standalone.

* Exceptional item: for the quarter primarily reflects charge on Employee Separation Scheme.

* During 9MFY22, the company recorded turnover of Rs.1,74,635 cr as against Rs. 1,07,072 cr; the EBITDA increased from Rs. 16,943 cr to Rs. 48,460 cr – the EBITDA margin stood at 27.7% as against 15.8% in 9M FY21. At the net level, the company recorded a profit of Rs. 31,914 cr as against Rs. 1,028 cr in 9M FY21. The EPS stood at Rs. 252.24 as against Rs. 6.08 in 9M FY21.

* In Q3FY22, the Indian steel sales consumption increased by 13% QoQ led by higher sales volume from branded products and retail segment and industrial products & projects. However, sales to automotive segment were impacted due to semiconductor shortages. European operations remained flattish on account moderation in steel prices, higher inventory valuedue to higher prices and higher coal and energy costs.

* Added 33 new products from Indian operations and will continue to focus on value added products.

* Coking coal cost stood at $269/tonne which was higher by 61% QoQ .Moreover, it is expected to increase by $40/tonne with respect to Indian operations and €30-35/tonne with respect to European operations.

* Working capital and Capex for the quarter stood at Rs. 20 bn and Rs. 30 bn respectively. The company generated free cash flowof Rs. 63 bn.

* The 5 MTPA expansion at Kalinganagar are expected to get commission by Q2FY23 which will incur higher capex in FY23.

* Deleveraging will be continued on sequential basis while capex is set to be in the range Rs. 100 to Rs. 120 bn in FY22 and Rs. 100 to Rs. 150 bn in long run. However, company aims to keep Net debt/EBITDA target within the range of 1-2x in long term.

OUTLOOK AND VALUATION

The company has reported healthy margins during 9MFY22, the management has also suggested plans for expanding its long products capacity with acquisition of Neelachal Ispat Nigam ltd which is expected to complete by the end of this year. The land bank, captive iron ore capacity and closes ness to Tata steel plants provide considerable synergetic advantage to the company. However, we expect the margins of the company to come down to normalized levels as they seem to have peaked and also production from China increases causing pressure on prices due to increased supply thus we have reduced the margins for the company and also the EV/EBITDA multiple from 7.2X to ~4.9X. Going forward, we expect the company to deliver an EBITDA of Rs. 51,635 cr in FY24; assigning a target EV/EBITDA multiple of ~4.9X we arrive at a target price of Rs. 1,658 showcasing an upside potential of ~36% from current levels with an investment horizon of 18-24 months. Thus, we maintain our rating at BUY.

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