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Weak results; debt mounts on NINL payout

* TATA reported a weak but inline quarter as domestic ASP took a breather after imposition of export duty. Standalone results were below estimates; while the Europe business was weak QoQ, but it was on expected lines.

* TATA’s standalone revenue at INR322b was 1% lower YoY, but was up 1% QoQ, and in line with our estimate of INR 317b.

* Standalone EBITDA stood at INR48b, down 64% YoY and 49% QoQ. A sharp ASP decline of INR14,660/y QoQ led to INR 14,445/t correction in EBITDA/t. EBITDA was 11% lower than our estimate.

EBITDA/t came at INR 10,177/t, down 67% YoY and 59% QoQ, and ~INR 1300/t below our estimates.

* Adjusted PAT stood at INR27b, down 70% YoY and 57% QoQ, owing to lower EBITDA. Adjusted PAT was 7% lower than our estimate.

* Tata Steel Europe (TSE) reported a sharp drop in EBITDA/t to USD123/t from USD366/t in 1QFY23. The sharp correction in the EBITDA/t at TSE was driven by USD86/t reduction in ASP with a corresponding hike of USD 89/t in the overall costs, driving down the profitabilityTATA’s consolidated revenue of INR599b was down 1% YoY and 6% QoQ, but in line with our estimate of INR 628b. EBITDA came in at INR60b, down 62% YoY and 63% QoQ, an 8% miss to our EBITDA estimates.

* EBITDA/t on a consolidated basis was at INR8,382/t, down 62% YoY and 63% QoQ. APAT stood at INR15b, sharply down 86% YoY and 80% QoQ, a 13% miss to our estimates. A sharp drop in the APAT was driven by weak operating results and marginally higher finance cost.

* Net debt increased INR 172b QoQ to INR718b from INR544b earlier due to (a) INR 102b payout for NINL acquisition, (b) INR 62b dividend payout and (c) INR 34b capex, largely toward Kalinganagar (TSK) expansion.

Spreads to compress at TSE, improve in India

* A large part of steel contracts will be repriced in Europe in January, post which, we believe TSE will look at a substantial reduction in topline. If input costs do not correct to a similar extent, we expect significant compressions in margins in 4QFY23.

* Coking coal prices have shot up again in the last month to USD325/t from the recent lows of UDS250/t. The increase in prices will get reflected in 4QFY23 results, adding pressure on margins.

* Domestic ASP, however, is more reflective of the spot market (compared to TSE, which has a lag in ASP vs spot prices). With the monsoons over, we expect steel prices to pick up from mid-Nov, driving margin improvement. Further, a reduction in coking coal prices in 3Q should also help margins. However, we note that Asian HRC prices have been correcting due to the weak Chinese economy, which could restrict the steel price upswing in the domestic market in 2HFY23.

Valuation and view

* During the quarter, the company witnessed the full impact of correction in steel prices after the imposition of export duty in India.

* The entire reduction in steel ASP was reflected in the reduction in EBITDA/t as the benefit of higher volume was offset by higher other expense and RM costs.

* With a sharp correction in TSE steel ASP expected in 4Q and domestic steel price recovery especially in the flats product segment under question due to weak chinese economy, we believe the upside to the stock is limited.Further, a spike in net debt, though temporary, will also prevent outperformance of the stock in the near term.

* However, the stock is trading at 1x P/B on a FY23 basis, with a 16% RoE expectations, which we believe is reasonably pricing in the downside as well.

* The stock is available at 4.7x FY23 EV/EBITDA, which looks optimally priced at mid-cycle valuations. We have marginally raised our FY23 EBITDA by 3% on the expectation of a sharp correction in iron ore prices (coking coal already factored in) for the European business. We have lowered our India EBITDA estimates marginally.

* We reiterate our Neutral call on the stock with revised a SoTP-based TP of INR 94 (v/s 91 previously).

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