Broader JV with Thyssen should be on track, but Tata may be willing to adjust deal terms given recent divergence in margin trends. With net debt rising, post-Bhushan deal, Tata may be keen to push through the JV, so that it could deconsolidate JV debt. Stronger GBP, EUR likely affected TSE margins in 4Q, but Fx headwinds have partly reversed. We adjust our estimates factoring Bhushan acquisition. Maintain Hold with revised TP of R586.
Thyssen is seeking to renegotiate JV terms, as per media reports. We think Tata may grant some concessions given a) recent divergence in margins vs. TKA; b) TKA is under pressure from its shareholders; c) Tata’s net debt has risen 1.6x post recent Bhushan deal; de-consolidation of JV debt could reduce group debt.
Both Tata and TKA want to de-consolidate the JV liabilities. Possible options are a) lower debt transfer by Tata or b) adjustment of equity stake but keeping voting rights at 50:50, as indicated by media reports. Based on TSE FY19E EBITDA est., our TKA analyst’s est and assuming no synergies, est. value shift towards Tata may be around $0.5-0.6 billion.
Higher costs due to maintenance/up-gradation outages hit margins in 3Q. There may have been tail effects in 4Q. TSE input cost/tonne appears to have surprisingly diverged vs input price trends in recent Qtrs. Stronger GBP, EUR have likely lifted fixed cost/tonne & hit margins by $17-20/tonne in 4Q, as per our est. EU peers should be affected too, but TSE UK is uniquely exposed to stronger £. Given recent EUR, GBP depreciation, this may partly reverse and aid margins in 1Q.
We lift FY 19-20 EBITDA by 17%-21%, but cut our FY19 -20e EPS by 9%/4% factoring Bhushan and higher TSE EBITDA est. We assume no captive ore at Bhushan, given uncertainty around approvals. Our FY19E net debt rises to R102000 crore and net debt/ EBITDA rises to 3.9x. Our PT falls to R586. Our prior valuation factored Bhushan, but assumed captive ore. With captive ore, valuation could rise by 6%-8%. 1Q margins should be strong at both India and TSE, but with spreads/ prices likely to moderate, margins could soften thereafter.