1. Tata Steel Q1 beats estimates; Why this brokerage house still recommends ‘Sell’

Tata Steel Q1 beats estimates; Why this brokerage house still recommends ‘Sell’

Tata Steel announced its June quarter results on Monday with the company reporting a consolidated net loss of Rs 3183.07 crore as compared to a net loss of Rs 316.91 crore for the same quarter in the last year.

By: | Published: September 13, 2016 12:53 PM
Tata Steel Q1 beats estimates; Why this brokerage house still recommends 'SELL' Tata Steel announced its June quarter results on Monday with the company reporting a consolidated net loss of Rs 3183.07 crore as compared to a net loss of Rs 316.91 crore for the same quarter in the last year. (Photo: Reuters)

Tata Steel announced its June quarter results on Monday with the company reporting a consolidated net loss of Rs 3183.07 crore as compared to a net loss of Rs 316.91 crore for the same quarter in the last year. At 21 per cent, the steelmaker’s operating profit or EBITDA (earnings before interest, tax, depreciation and amortisation) beat analysts expectations, which was higher than the year-ago period. This was driven by improved operating performance in India, Europe and South East Asia. The share price of the company closed 5.30 per cent at Rs 373.60 on Monday.

Brokerage House Religare Institutional Research in a note said,”Tata Steel’s Q1 consolidated EBITDA beat street estimates by 12 per cent to Rs 32,00 crore led by the EU business and other subsidiaries. However at the net level, the company posted losses of Rs 31.8 bn due to one-offs of Rs 32.9bn from discontinued operations. We raise FY18 India/EU EBITDA estimates by 5 per cent/40 per cent to factor in the Q1 EBITDA beat, but believe the risk-reward is unattractive amid falling steel prices, declining EU spreads, and higher coking coal prices.”

The company’s total income decreased by 5.50 per cent at Rs 26542.83 crore for quarter under review as compared to Rs 28087.38 crore for the quarter ended June 30, 2015. ‘

Religare, however, has maintained a ‘Sell’ rating on the stocks with a revised target price of Rs 325 as it feels that company has presented a weak outlook for second quarter. It said, “Tata has guided for an Rs 1,000/t or more decline in domestic steel prices in Q2FY17, a negative in our view. However, management expects the EU business to sustain Q1 profitability in FY17 due to the lag impact of rising spreads. However, assuming that India does an EBITDA/t of Rs 11,000 and Netherlands $ 60 (similar to Arcelor Mittal’s), the scope of net debt reduction is negligible in FY17 given outflows pertaining to interest costs and capex. In FY18, at a similar profitability rate, there could be a 4-5% cut in net debt due to higher KPO volumes.”

The brokerage feels that although earnings have recovered, incremental earnings visibility due to higher coking coal prices remains low.

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