Our analysis of TATA’s FY19 annual report indicates that while domestic operations continue to improve, UK operations remain a key concern.
Our analysis of Tata Steel’s (TATA) FY19 annual report indicates that: standalone operations are robust, growing and improving; domestic operations are self sufficient to meet capital commitments; and UK operations could continue to be funded by the standalone entity. Going ahead, we are concerned on UK operations and believe the FY20 $1bn deleveraging target is challenging. Maintain hold/SP at TP of Rs 400, implying an exit multiple of 6.4x FY21E Ebitda.
Positive: Rising profitability and share of domestic operations We are upbeat on TATA’s domestic operations as: recent acquisitions of Bhushan Steel and Usha Martin steel business will strengthen its presence in the premium auto segment; value-added capacity ramp up and brownfield expansion at KPO will be beneficial in the medium term; and focus on retail and branded products will partially insulate earnings from steel price cyclicity. Going ahead, we expect domestic business to be the bulwark and its overall share in volumes to rise from 26% in FY09 to 60% by FY22.
Tata Steel UK (TS-UK) remains key concern TS-UK continues to remain an Achilles heel for the company with near-term concerns on: possible capital injection by parent entity; insufficient cash generation to meet capital commitments; weak operating environment; and uncertainty around Brexit. On the positive front in Europe, the pension fund is adequately funded and we expect Netherlands operations to remain profitable. However, TS-UK is expected to continue to drag near-term earnings.
Our analysis of TATA’s FY19 annual report indicates that while domestic operations continue to improve, UK operations remain a key concern. The fact that standalone cash flows may be utilised to fund the loss-making UK operations remains a principal concern.