Tata Steel’s (TSL) Q1FY19 Ebitda at ~Rs 64.6 billion (adjusted for one-off items of Rs 1.3 billion) met consensus estimate. Key highlights: (1) domestic operations grew 71% y-o-y to Rs 50.7 billion (Ebitda/t at Rs 17,077; (2) Tata Steel Europe’s (TSE) Ebitda/t of $102 jumped 26% y-o-y; (3) net debt jumped to Rs 103 billion owing to completion of BhushanSteel’s acquisition.
Going ahead, we envisage the performance to sustain riding: (a) robust domestic spreads, and (b) ramp up at Bhushan Steel to ~5mtpa in 24 months.
Taking cognizance of spurt in net debt post Bhushan Steel acquisition, we cut our TP to Rs 720 (earlier Rs 777). In our view, deconsolidation of TSE is expected to reduce net debt by Rs 20 billion (value accretion of Rs 70/share). Maintain ‘buy’. Consolidated Ebitda at Rs 64.5 billion was driven by: (1) robust Ebitda/t at domestic operations up 61% y-o-y to Rs 17,077. Excluding one-offs of Rs 3.5 billion, adjusted Ebitda/t would have been Rs 18,256; (2) solid improvement in TSE’s Ebitda to $102/t driven by better spreads and increased efficiency at hot strip mill in UK; and (3) Southeast Asia reported Ebitda/t of Rs 1,833, up 5.0x y-o-y.
Going ahead, we believe spreads could sustain due to: (a) supply curbs in China; (b) in the domestic market, supply-demand balance looks benign, though realisation is expected to be down Rs 500/t in Q2FY19 owing to seasonal factors.
We maintain that Bhushan Steel’s acquisition will be largely value accretive in the long run. In the short term, however, the higher net debt is expected to weigh. We believe, Bhushan Steel’s Ebitda/t can improve through: (1) capacity ramp up, and (2) iron ore supply from TSL’s captive mines. We estimate FY19/FY20 volumes at 3.6mt /4.5mt.
We continue to see value in the long run as TSL focuses on profitable domestic operations. Deconsolidation of TSE is expected to bring relief to the currently burgeoning net debt. At CMP, the stock is trading at 5.9x FY20E EBITDA. We maintain ‘Buy/SO’ with a TP of `720, implying an exit multiple of 6.5x FY20E Ebitda.