Neutral Tata Steel Ltd For Target Rs.120 - Motilal Oswal Financial Services Ltd
In line performance; Europe continues to struggle
* Tata Steel (TATA) reported in line operating performance, aided by improved ASP for India business and better operating efficiencies in 1QFY24.
* Standalone Performance: TATA’s revenue was up 1% YoY at INR323b, in line with our estimate of INR339b. EBITDA declined 32% YoY at INR65b and was in line with our estimate of INR66b.
* Standalone ASP improved INR1,178/t QoQ to INR70,004/t and EBITDA/t was down by INR2,345/t QoQ to INR13,981/t (INR538/t higher than our estimate of INR13,443/t).
* APAT was down 31% YoY to INR43b (43% higher than our estimate of INR30b). The beat was driven by higher ‘other income’ and lower depreciation charge.
* Consolidated Performance: TATA’s revenue was in line with our estimates, aided by higher realizations (5% above estimate), which were partially offset by lower volumes (4% lower). Revenue was down 6% YoY at INR595b; EBITDA was in line with our estimate and was down 65% YoY at INR52b and APAT stood at INR6b (36% miss).
* The miss in APAT was due to higher tax outgo and loss in share from associate companies. The company incurred a non-cash deferred tax charge on account of buy-in transaction at British Steel Pension Scheme. With this, the insurance buy-in of BSPS has been completed, successfully de-risking Tata Steel UK.
* Consolidated EBITDA/t stood at INR7,186, which was up INR424/t, above our estimate of INR6,762/t.
* Tata Steel Europe (TSE) continues to drag the consolidated performance and revenue was down 18% YoY at INR213b. EBITDA loss per tonne for the quarter stood at USD98/t (up USD7/t QoQ). The impact was due to elevated energy costs, higher employee costs, and lower production due to planned relining at BF-6 at Netherlands.
* Gross debt increased INR55b to INR904b (vs. INR849b in 4QFY23) and net debt stood at INR714b. Net debt-to-EBITDA came in at 2.9x (up 85bp QoQ) and net debt-to-equity at 0.7x (up 8bp QoQ).
Highlights from the management commentary
* The FY24 incremental production and sales target of 1.5mt remains unchanged. The additional volumes will be generated through the efforts of NINL and the SMS caster at Kalinganagar.
* The Kalinganagar BoF is expected to become operational by Feb-Mar’24. The benefits from its complete ramp-up are projected to start accruing in FY25.
* Indian steel demand is resilient; there is a strong demand from sectors such as automobile, industrial construction, infrastructure and commercial real estate.
* Standalone realizations are expected to be down in 2QFY24 by around USD40/t and realizations in Europe are expected to be down by around USD48/t; however, reduction in coal cost by USD57/t in India and USD46/t in Europe should provide certain cushion to the fall in ASP.
* BF-6 relining at Netherlands should be completed by the end of 2QFY24, and hence, the production in Europe will continue to be adversely impacted in the near term.
* TSE has completely de-risked the BSPS liability.
* FY24 capex is expected to be around INR160b
Domestic demand resilient; headwinds in Europe persist
* In 1QFY24, steel prices were adversely impacted by higher exports from China and lower demand in international markets.
* Despite the impact of global metal prices, TATA managed to enhance the ASP through contract sales and an improved sales mix.
* The Netherlands, which is essentially a positive CF vertical for TATA, has been struggling due to the planned relining of BF-6 since April’23. This relining process is expected to last for a period of six months.
* The volumes at TSE for 2QFY24 are expected to be muted and the improvement at the Netherlands is expected from 2H.
* European operations, especially in Britain, are expected to face headwinds and TATA is in negotiations with the local government to find a feasible solution for the continuation of the operations at TSE UK.
* Domestic steel consumption is resilient, though, and is likely to grow by 8-9mt YoY over the next few years.
* Management expects the sectors such as transportation, industrial construction, infrastructure, and commercial real estate to drive steel demand.
* The steel sector in India will consolidate the market leadership and TATA’s growth capex would expand the production to 40mt by FY30E.
* Coking coal prices have cooled down in the recent weeks and the benefit for the same will be reflected from 2QFY24 onwards.
* Domestic ASP, however, is more reflective of the spot international market (vs. TSE, which has a lag of one quarter in ASP than spot prices). Steel ASP for 2QFY24 is expected to reduce in line with prevailing international prices.
Valuation and view
* During the quarter, realizations improved in line, on the back of higher realizations from contract sales and better product mix. However, elevated input costs and energy prices adversely impacted EBITDA/t.
* Reducing coking coal prices should support margin expansion; however, global steel prices have been under pressure since Feb’23 and the management expects reduction in realizations for both domestic as well as European operations in 2QFY24.
* Similarly, natural gas in Europe has also cooled off, but as TATA has hedged its natural gas position, it will take one more quarter for the benefits to accrue.
* We have largely maintained our estimates for FY25 to factor in the current macro-economic scenario and the stock is trading at 5.9x FY25E EV/EBITDA and 1.3x FY25E P/B. We reiterate our Neutral rating on the stock with SOTP based TP of INR120 (Previous INR110).
Read Complete Report & Disclaimer Click Here
For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412
Above views are of the author and not of the website kindly read disclaimer
