Neutral Tata Steel Ltd For Target Rs.140 by Motilal Oswal Financial Services Ltd
Healthy beat on EBITDA driven by lower costs; EU losses decline
Standalone performance
* Tata Steel (TATA)’s 3QFY25 revenue came in line at INR328b, -5% YoY (+1% QoQ), primarily due to a weak ASP, which dipped 13% YoY and 2% QoQ to INR61,929/t. The QoQ performance was largely supported by a healthy sales volume of 5.3mt (+8% YoY and 4% QoQ) during the quarter.
* Crude steel production stood at 5.69mt (+6% YoY/+8% QoQ) and finish steel production was at 5.41mt (+5% YoY/+7% QoQ) in 3QFY25.
* EBITDA stood at INR75b (YoY/QoQ: -9%/+13%) and was better than our estimate of INR62b. EBITDA/t came in at INR14,179/t (YoY/QoQ: - 16%/+10%), against our estimate of INR11,570/t during the quarter. The beat was primarily led by lower-than-expected costs. Other expenses for the quarter included a write-back of INR14b towards a provision for claims no longer required.
* TATA posted an APAT of INR40b, -13% YoY (+13% QoQ) vs. our est. of INR32b.
European operations
* Consolidated steel deliveries stood at 2.1mt (+8% YoY/-1% QoQ), in line with our estimate. TATA Europe reported an in-line revenue of INR195b (+2% YoY/-2% QoQ) for the quarter. Healthy volume growth was offset by weak ASP, which stood at USD1117/t (-5% YoY and -4% QoQ) during the quarter.
* The operating loss has reduced to INR7.4b (vs. our estimated loss of INR10.6b) in 3QFY25 against INR29b in 3QFY24 and INR13b in 2QFY25.
* EBITDA loss per ton declined to USD42/t in 3QFY25 from USD76/t in 2QFY25 (vs. our estimated loss of USD60/t), primarily because of lower operating costs in the UK (closure of BFs) and lower energy costs in the Netherlands.
Consolidated performance
* Consol. revenue came in at INR537b (-3% YoY/flat QoQ), in line with our estimate. This was primarily led by a healthy sales volume of 7.7mt (+8% YoY/+3% QoQ), which was offset by a muted ASP of INR69,493/t (-10% YoY/- 3% QoQ) during the quarter.
* Adjusted EBITDA (ex-forex movement loss of INR12b) stood at INR72b (+25% YoY/+30% QoQ) against our estimate of INR45b, translating into an EBITDA/t of INR9,268/t (+15% YoY and +26% QoQ) during the quarter.
* The company reported an APAT of INR7.4b against our estimate of INR1.9b.
* For 9MFY25, revenue declined 5% YoY to INR1623b, while EBITDA grew 28% YoY to INR194b and APAT was at INR25b up by 42% YoY.
* Net debt declined to INR858b in 3Q vs. INR888b in 2QFY25, translating into a net debt-to-EBITDA of 3.34x as of 3QFY25.
Highlights from the management commentary
* For the India business, management guided NSR to be flat QoQ in 4QFY25. Any safeguard duties announcement will support pricing in the near term.
* For the Netherlands/UK, management foresees an NSR decline of GBP60/t QoQ in 4QFY25 over the renewal of annual contracts.
* Coking coal costs (on a consumption basis) for India operations are likely to be USD10/t lower QoQ in 4QFY25. For the Netherlands operations, coking coal may see a fall of USD20/t QoQ, whereas iron ore might be lower by USD3-4/t QoQ.
* Operating losses for the UK operations were lower in 3QFY25, and considering the current pricing/demand environment, management expects the UK business to break even in the coming quarters.
* NINL achieved all operational targets and is running at full capacity. The EBITDA margin improved to 20% in 3QFY25 from 13% in 2QFY25, supported by the rise in volumes and cost efficiency measures that reduced conversion costs by INR3,000/t..
Valuation and view
* The India business posted a decent performance, driven by lower costs. Domestic demand is expected to improve in 4Q, with rising govt. spending and construction activities. The management expects EBITDA losses from UK operations to further reduce in coming quarters, along with capacity ramp-up in the Netherlands and lower fixed costs, which should boost the overall EBITDA performance of its European operations.
* Though there are near-term challenges related to high imports and lower realizations, the long-term outlook remains strong for TATA. While the India business is expected to continue its strong performance, improving performance in the European business would support overall earnings.
* We have marginally reduced our revenue/EBITDA estimates by 4%/5% for both FY25/26 and PAT by 5%/10% for FY26/FY27. TATA is trading at 5.6x FY27E EV/EBITDA and 1.6x FY27E P/B. We reiterate our Neutral rating with a revised SOTP-based TP of INR140.
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