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Exceptional quarter; Promising Outlook

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 44.9% YoY to Rs. 60,783cr in Q3FY22, as improved realizations more than offset the drop in volumes.

* EBITDA fell 3.4% QoQ to Rs. 15,894cr (+66.1% YoY) while EBITDA margin contracted 120bps QoQ to 26.1%, due to increase in cost of raw materials and inventories.

* Improvement in global steel demand with sustained recovery in economic activities, higher steel prices, diversified product mix and new product launches will drive healthy topline growth in future. Hence, we reiterate our BUY rating on the stock with a rolled forward TP of Rs. 1,436 using SOTP valuation.

Improved net realisations drive topline growth

In Q3FY22, consolidated revenue grew 44.9% YoY to Rs. 60,783cr (stood flat on QoQ basis) as improvement in net realisations more than offset the drop in volumes. Overall production was at 7.76mn tons (vs. 7.77mn tons in Q2FY22 and 7.74mn tons in Q3FY21). Tata Steel India Crude steel production grew 4.6% YoY to 4.81mn tons and total domestic deliveries increased 4.9% YoY to 4.42mn tons, aided by progressive recovery in economic activities . On a sequential basis, broad based growth in domestic deliveries was offset by lower exports. Tata Steel India grew 37.8% YoY to Rs. 31,964cr, Tata Steel Europe surged 61.8% YoY to Rs. 22,769cr, while other Indian operations rose 92.0% YoY to Rs. 5,797cr.

Higher coking coal prices affects margins

EBITDA declined 3.4% QoQ to Rs. 15,894cr (+66.1% YoY) while EBITDA margin contracted 120bps QoQ to 26.1%, due to higher cost of raw materials at Rs. 20,547cr (+67.8% YoY, +15.7% QoQ) and costs pertaining to changes in inventories at Rs. 3,960cr (+370.4% YoY, +27.6% QoQ). This increase in costs was primarily due to higher coking coal prices across key entities. Thereby, PAT fell 19.7% QoQ to Rs. 9,573cr.

Key highlights

* Strong FCF generation of Rs. 13,214cr; debt repayment of Rs. 17,376cr in 9MFY22.

* Capex stood at Rs 2,790cr in Q3FY22; Work on 5MTPA expansion at Kalinganagar, Pellet plant and the Cold Roll Mill complex is progressing well.

* Tata Steel Long Products declared as the winning bidder to acquire 93.71% stake in the 1 MTPA Neelachal Ispat Nigam Limited.

* Tata Steel India developed 33 new products across customer segments in Q3FY22.

* Bottom-up initiatives drive 53% growth in Tata Tiscon retail sales.

* 1st company in the world to conduct trials to inject Coal Bed Methane gas into a blast furnace in a bid to reduce coke consumption during steel making.

Valuation 

Increased allocation in infrastructure spends will have a multiplier effect on economy and create huge demand for steel in India. Global steel demand will continue to grow with pick-up in economic activities and improved business sentiments. Company’s sustained focus on strong FCF generation, deleveraging efforts and increased capital allocation coupled with higher steel prices and favorable product mix will drive the performance of the company in future. With this promising outlook, we reiterate our BUY rating on the stock with rolled forward TP of Rs. 1,436 using SOTP valuation.

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