At first glance, Tata Steel’s Q1FY17 numbers appear good. Ebitda surpassed our expectations on improved performance by international operations. Perusing the operating matrix, we have raised FY17/18E Ebitda by 6/16%.
The key challenge remains gross debt of R855 billion (FY17E debt: Ebitda at 5.7x) which is rising q-o-q, giving us little comfort on how debt will lower and help us in revisiting our 12 month TP.
We agree that increase in steel price by Boasteel will reduce the risk of domestic price contraction, but spreads are likely to fall as spot coking coal prices are 2x higher than Q1FY17 levels.
Net-net we maintain ‘reduce’ with an unchanged TP of `294 on FY18E. At CMP, the stock is trading at 6.6x FY18E Ebitda. Our only ‘buy’ call in metals & mining sector is Coal India, where downside risk to EPS from global price decline is limited.
Consolidated Ebitda was boosted by European operations, generating positive Ebitda (`8.5 billion versus loss of `5.7 billion in Q4FY16) and 6x y-o-y Ebitda growth for South East Asian operations.
Value-added products along with better revenue-cost spread helped margins expand. As a result, consolidated ebitda margin was up to 12.3% versus 9.6% in Q1FY16 and 7.5% in Q4FY16.
Domestic Ebitda also jumped 20% y-o-y to `22.6 billion on higher revenue, despite sales volume remaining stable. Gross debt rose by `35 billion q-o-q to `855 billion. FY17E gross debt/Ebitda is at a high of 5.7x.