Despite demand headwinds from auto sector weakness, TS-BSL reported better-than-expected Ebitda of Rs 9,100/t.
Tata Steel BSL’s Q1FY20 Ebitda of Rs 780 crore surpassed our estimate. Key highlights: 1) proportion of exports fell to 15% in Q1FY20 (Q4FY19: 26%); 2) shipments were flat at 0.86mt; and 3) lower cost of production. Going ahead, we expect the demand headwinds to sustain on weakness in the auto sector and the company’s Ebitda/t to dip following recent decline in steel prices to Rs 7,200-7,500 despite cost optimisation initiatives. Maintain ‘hold’ on Tata Steel (TSL) with TP of Rs 520 on 6.3x September 2020E Ebitda.
Despite demand headwinds from auto sector weakness, TS-BSL reported better-than-expected Ebitda of Rs 9,100/t. In our view, TS-BSL’s Ebitda/t rebounded 33% q-o-q (despite a 25% dip in volume) owing to: 1) domestic oriented product mix — proportion of exports fell to 15% from 26% in Q4FY19; 2) value-added premium over HRC jumped 41% q-o-q to Rs 9,035 owing to focus on the more profitable domestic market; and 3) raw material cost per tonne was down 8% y-o-y owing to lower coking coal prices, though iron ore cost stayed flat. Going ahead, we expect the prevailing weakness in the auto sector to weigh on TS-BSL’s performance in the near term.
We believe, the Ebitda uptick at TS-BSL may not get replicated in other companies’ numbers as such a shift in product mix is unusual within a quarter. Going ahead, in case of TS-BSL as well, we expect Ebitda/t to dip given the recent decline in steel prices. However, cost reduction initiatives being pursued at are likely to maintain it at Rs 7,200-7,500/t.
While TS-BSL is a good strategic fit to TSL, in the near term, there are challenges primarily due to the recent slowdown in the auto sector. We estimate Ebitda/t of Rs 7,200-7,500 through to FY21 on cost reduction initiatives being pursued at TS-BSL.
We maintain ‘hold/SP’ with TP of Rs 520. At CMP, the stock is trading at 5.9x FY21E Ebitda. Tata Steel is a diversified steel producer.