IGI Logo

Deleveraging surprises as Europe disappoints

Deleveraging (Rs 103bn in Q3FY21) through controlled capex aided by a strong steel cycle, and significant working capital release stood out from Tata Steel Q3FY21 results. The extent of working capital release continues to surprise and has been a key contributor towards deleveraging in 9MFY21 – reported EBITDA of ~Rs 161bn against deleveraging of ~Rs186bn in 9MFY21. Mark to market (MTM) Tata Standalone EBITDA approaches an all-time high print of Rs28,000/te – a red flag. Given such a predicament and the recent rally witnessed in the stock, we downgrade Tata Steel to REDUCE from HOLD with a revised target price of Rs617/share (earlier: Rs590) at 0.8x FY22E P/B. Q3FY21 adjusted consolidated EBITDA was lower than estimates mainly on Europe disappointment.

* Downgrade to REDUCE from HOLD; risk-reward deteriorating. Spot EBITDA at Rs28,000/te remains a key concern, especially when cycle duration has shrunk. The positive takeaways of Q3FY21 are: deleveraging – Rs 103bn of net debt reduction in Q3FY21, with Rs120bn of gross debt reduction guided for in Q4FY21. The company has called for payment on partly paid shares, issued on rights basis, at Jan,’18. The same should aid in Rs30bn of deleveraging. CRM and pellet plant capex in Odisha has been resumed. The fear is, as spreads stay elevated for a few more months, likeness towards capex may also increase. Our P/B of 0.8x (earlier: 0.9x) takes care of possible RoE scenarios as structural solutions for Europe is still awaited.

* Indian operations reported an improved print. Tata Steel India standalone adjusted EBITDA came in at Rs65.9bn (+46% QoQ, +93% YoY), ahead of consensus estimate of ~Rs58bn. Realisation increased ~ Rs 8000/te, EBITDA increased by ~ Rs 7,200/te, and EBITDA/te reached Rs 20,000/te, which is higher than consensus estimate in the range Rs18-19,000/te. Export proportion of volumes for India as a whole came down to 11% from 24% QoQ, while auto volumes increased 48% QoQ. The two marked mix improvement, helped realisations. With higher spot prices and resettlement of auto contracts, Q4FY21 EBITDA may well cross Rs 28,000/te.

* Europe EBITDA disappointed; structural solutions awaited. EBITDA came in at negative Rs7.2bn vs negative Rs4.6bn in Q2FY21 and negative Rs9.6bn in Q3FY20. EBITDA/te came in at negative Rs3,436* (~-ve US$46/te) vs I-Sec estimate in the range of US$30/te. The miss was mainly due to discontinuation of support from Netherlands government and a higher provision for carbon emissions. Given sharp run-up in carbon credit prices and high provisioning on account of the same in Q2/Q3FY21, there may be a possibility that enough warchest has been built to reduce the volatility of carbon credit prices from further impacting European EBITDA in the medium term.

To Read Complete Report & Disclaimer Click Here