IGI Logo

Result in line, Europe beats our estimates

Other subsidiaries offset beat in TSE

On a standalone basis, revenue/EBITDA/APAT grew 73%/33%/40% YoY to INR367b/INR122b/INR79b in 4QFY22. Revenue and EBITDA were broadly in line, while APAT was 9% above our estimate, led by a marginal 4% beat on EBITDA, lower-than-estimated finance cost, as well as higher other income.

On a consolidated basis, TATA reported a revenue/EBITDA/APAT of INR693b/INR150b/INR100b in 4QFY22, up 39%/6%/31% YoY.

The consolidated result was in line as other segments and forex adjustments offset the beat in its European result. One-time provisioning of INR13.4b (INR5.4b towards inventory write-off and INR8b towards shortfall in meeting its mining dispatch target after the acquisition of mines) was made in other subsidiaries.

TSE’s (Tata Steel Europe) earnings were a surprise, with an EBITDA/t of USD241 (est. USD178), even though ASP was in line. TSE continues to ride the steel price boom in Europe after the ban on steel exports from Russia and unavailability of steel from Ukraine.

The company embarks on long-term capex

TATA plans to raise its India capacity to 40MT by FY30 from 21MT at present (including Neelachal Ispat, or NINL). Capacity of 5MT will be commissioning in FY24 as part of TSK-II. For the balance, it has the option to expand either at Jamshedpur (to 16MT from 10MT), Kalinganagar (to 16MT from 8MT), Angul (to 10MT from 5MT), or at NINL (to 10MT from 1MT).

The company is setting up 0.75MT EAF plant at Rohtak, Haryana, which will source scrap locally and sell TMT in the vicinity. If successful, similar setups will be established in West and South India.

For its European operations, the management has not discussed the roadmap to transition to green steel, while its competitors have allocated a capex of USD4-5b over the next decade. The management is still evaluating options, given the recent shortage of natural gas in Europe and nonavailability and techno-economic feasibility of hydrogen in blast furnaces.

Highlights from the management commentary

The management said it will be able to maintain India EBITDA margin at similar levels in 1QFY23. While coking coal costs will rise by USD100/t in India, it will be offset by an INR8,000-8,500/t hike in ASP.

In Europe, coking coal prices will rise by EUR50-60/t. The hike in ASP will be ~EUR60/t. Thus, margin in Europe will also remain stable.

The company will commission a 0.75MT scrap-based EAF in North India soon. If successful, this model will be replicated in North, West, and South India.

Growth capex target for FY23 is INR120b, which can overshoot if cash flows are strong.

The company will not focus on growth capex over the next decade.

The management believes that steel demand and prices will remain strong over the next several years as the disruptor in the past (China) will no longer be adding 50-60MT to its capacity annually and it may not export significantly higher quantities to disrupt steel prices globally.

These are the key reasons why the management has, in our view, embarked on a significant capacity growth journey in India, other than the fact that the country is among the fastest growing steel markets and per capita consumption of steel is far below the global average.

Valuation and view

We are cautious on steel demand in India at current steel prices. With the onset of the monsoon over the next two months, steel prices are set for a correction. However, strong cash flow for TATA will support any downside from current levels.

The stock trades at 4.3x/4.4x our FY23/FY24 EV/EBITDA estimate. On a P/B basis, the stock is quoting 1.2x/1.1x our FY23/FY24 estimate. We maintain our Neutral rating with a revised SoTP based TP of INR1,440 share (from INR1,500 earlier).

To 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