Tata Steel ratings| Buy— Surprise in Europe ensures Ebitda beat

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Published: April 30, 2019 1:25:16 AM

We estimate volume growth of 1mt in FY20 led by Usha Martin, ramp-up of Tata Steel (TS)-BSL and debottlenecking at Jamshedpur.

Management guided for debt repayment of bn in FY20 as well with cash flow from divestment of SEA operations and TSE as further sweeteners.

Tata Steel’s (TSL’S) Q4FY19 Ebitda of `75.1 bn (up 16% y-o-y) surpassed consensus, driven by Tata Steel Europe (TSE). Key highlights: (i) standalone Ebitda/t at `13,804 came broadly in line; (ii) TSE’s Ebitda/t jumped 33% y-o-y to $94 riding carbon credits & asset sale benefits; and (iii) deleveraging continues to remain a priority – `101 bn of debt was repaid during the quarter. Going ahead, we see the following value enablers for the stock: (i) restructuring of European operations largely on track; (ii) cash accretion of $327 mn from part divestment of South East Asian (SEA) operations; and (iii) enhanced focus on profitable domestic operations. Maintain Buy on TSL with unchanged TP of `600/share. The stock is currently trading at 6.1x FY21e Ebitda.

Surpasses estimates on TSE performance

TSL’s Q4FY19 Ebitda surpassed consensus estimates primarily on better-than-expected TSE performance. Key highlights: (i) standalone Ebitda/t at `13,804 dipped 13% y-o-y on lower realisation and slowdown in the profitable auto segment; and (ii) TSE’s Ebitda/t at $94 was up 33% y-o-y riding benefits of carbon credits and refined product mix pursuant to blast furnace 5 resuming operations at Port Talbot. Going forward, we expect TSL’s performance to be driven by the more profitable domestic segment in a challenging operating environment.

Buoyed by 2D: Domestic focus and deleveraging

We estimate volume growth of 1mt in FY20 led by Usha Martin, ramp-up of Tata Steel (TS)-BSL and debottlenecking at Jamshedpur. We peg sustainable Ebitda/t from standalone and TS-BSL at `13,600 and `7,500, respectively. We are also upbeat on TSL using excess cash to pay off debt. Management guided for debt repayment of $1 bn in FY20 as well with cash flow from divestment of SEA operations and TSE as further sweeteners.

Outlook: Value drivers in place

We remain upbeat on TSL on impending benefits of restructuring of TSE and SEA operations. We believe, domestic operations are better placed compared to peers to tide over the current subdued operating environment. We maintain ‘BUY/SO’ with TP of `600, implying an exit multiple of 6.3x September 2020 Ebitda.

 

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