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Revenue in line; marginal beat on earnings driven by lower costs

* Tata Steel (TATA)’s revenue stood at INR330b (-7% YoY/-10% QoQ), largely in line with our estimate of INR340. Lower volumes and weak realization led to the QoQ decline. ASP stood at INR66,720/t (-10% YoY/-1% QoQ) vs. our estimate of INR68,815/t.

* EBITDA was INR68b (+2% YoY/-16% QoQ), marginally better than our estimate of INR66b, thanks to lower input costs.

* EBITDA/t came in at INR13,711/t (-2% YoY/-8% QoQ) vs. our estimate of INR13,416/t.

* APAT stood at INR36b (-23% YoY/-24% QoQ), in line with our estimate.

* Steel production stood at 5.01mt (+4% YoY/-4% QoQ). Deliveries stood at 4.94mt (+3% YoY/-9% QoQ), led by a 4% rise in domestic deliveries.

Consolidated performance

* Sales volume stood at 7.39mt (+3% YoY/-7% QoQ), 5% below our estimate.

* Revenue came in at INR548b (-8% YoY/-7% QoQ), 6% below our estimate of INR580b. The decline in revenue was attributed to lower volume QoQ.

* Blended ASP stood at INR74,116/t (-10% YoY/+1% QoQ), as expected.

* EBITDA stood at INR67b (+29% YoY/+1% QoQ) vs. our estimate of INR60b, on account of lower than expected costs.

* EBITDA/t was INR9,059/t vs. our estimate of INR7,639/t.

* APAT came in at INR13b (+112% YoY/+9% QoQ) vs. our estimate of INR11b, which was mainly driven by better operating performance.

European operations

* Consolidated crude steel production stood at 2.37mt (+32% YoY/+11% QoQ), and sales came in at 2.15mt (+8% YoY/+1% QoQ) during the quarter.

* Revenue stood at INR209b (-2% YoY/+1% QoQ) vs. our estimate of INR226b. The miss on revenue was due to lower than expected volume and NSR.

* ASP stood at USD1,171/t (-10% YoY/+1% QoQ) vs. our estimate of USD1,234/t for 1QFY25.

* EBITDA loss declined to INR5b, in line with our estimates. EBITDA loss per ton stood at USD28/t in 1QFY25 vs. USD38/t in 4QFY24.

Highlights from the management commentary

* TATA expects the NSR for domestic operations to decline INR1,500/t in 2QFY25 sequentially.

* The ASP for the UK operation will remain flat QoQ, whereas the Netherlands could see GBP60/t QoQ reduction during 2QFY25.

* Coal costs (on a consumption basis) for India operations are likely to be USD15/t lower QoQ, and in the Netherlands, the coal costs are anticipated to decline USD26/t QoQ in 2QFY25.

* In terms of iron ore, the UK could experience USD7/t QoQ decline, while the Netherlands could see about USD10/t QoQ increase in 2QFY25.

* Management guided that Sep’24 will be the last month of operating losses for UK business. From 2HFY25 onwards, the UK business is most likely to report breakeven or marginal operating profit.

Valuation and view

* The India business has posted a decent performance, and domestic demand is expected to continue its momentum, while TATA’s European operating losses have been reducing. Management guided its UK operations to start reporting positive EBITDA from 3QFY25, turning the overall Europe operation EBITDA positive. This would be mainly due to better volumes and muted input costs.

* TATA has laid out the road map to scale domestic operations further, under the Phase-III expansion and will take the total capacity to 40mt.

* While there are near term challenges related to high imports and lower realizations, the long term outlook remains strong. We have largely retained our estimates for FY25 and FY26. TATA is trading at 7x FY26E EV/EBITDA and 2.0x FY26E P/B. Reiterate Neutral with an SOTP-based TP of INR180.

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