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From whether Tata can trade at 1.5x P/B to what will be the downcycle valuations

The headline reflects the changing investor assessments over H1FY22 (as noted earlier). Tata Steel (TSL) reported lower-than-expected EBITDA in Q2FY22 at Rs178bn (adjusted) against Rs191bn expected. TSL India drove the miss on account of higher other expenses. H1FY22 net debt reduction of ~Rs60bn against Rs328bn of consolidated EBITDA is much lower than initially expected (Rs30bn has been the dividend payment). We downgrade TSL to REDUCE from HOLD with a revised target price of Rs1,150/share (Rs1,365/share earlier) at 1.1x FY23E P/B. If the EBITDA/te contracts for 4-5 quarters, won’t there be a better value discovery? We believe so.

* TSL India reported lower-than-expected EBITDA. TSL’s standalone numbers have been restated from April 1, 2019 to reflect Tata Steel BSL’s merger into TSL. Nevertheless, the numbers were below expectations and have been the main driver for consolidated EBITDA miss. Other expenses have been much higher than expected. Other expenses increased primarily due to higher royalty, rates & taxes on account of MMDR Act amendment (sales to Tata BSL) and higher reference prices for iron ore. Part of the increase will not recur post-merger of Tata BSL. Overall (India) deliveries increased 11% QoQ despite market demand contraction amidst seasonal weakness. The mix of auto, however has fallen by 4pps QoQ; must have resulted in some margin weakness.

* Tata Steel Europe reported inline EBITDA at US$211/te. Volumes declined by 8% QoQ due to seasonal impact as well as slowdown in automotive steel sales amidst semiconductor shortage. Raw material cost increased US$30/te QoQ primarily due to increase in iron ore and coal consumption cost with higher prices due to lagged effect. Other expenses increased primarily due to higher energy cost with higher repairs & maintenance expenses, partially offset by lower provision on account of carbon emission rights.

* Standalone and consolidated cashflow analysis. TSL witnessed buildup of Rs31bn in working capital in H1FY22 in standalone. Total capex in standalone in H1FY22 is Rs24bn and there is a large amount of loan given of Rs165bn which appears in standalone cash flows. The same reflects under ‘loans’ in standalone non-current financial assets. There is no meaningful repayment of borrowings that we can see from cashflows in H1FY22. Against consolidated EBITDA of Rs328bn, TSL could generate Rs69bn of FCF only. Consolidated cashflows witnessed Rs122bn increase in working capital and Rs113bn of gross debt reduction. Majority of the consolidated gross debt reduction has been helped by loans from parent (as per our analysis).

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