Tata Steel’s (TATA) third quarter result reflects the challenges faced by the industry, with consol EBITDA/tonne of Rs 3,614 dropping to the lowest level in the past 15 quarters due to a sharp decline in steel prices. TATA thus reported a consol PBT loss for the first time in 16 quarters. Given the challenges in the European business, we cut our FY20/21 EBITDA estimates marginally and maintain ‘neutral’ with a target price of Rs 450 (based on SOTP). Consol EBITDA declined 5% Q-o-Q (-46% Y-o-Y) to Rs 3,620 crore (our estimate: Rs 3,820 crore) in 3QFY20 due to weak steel spreads and higher exports from India. Consol PBT loss stood at Rs 560 crore, including Rs 330-crore extraordinary expense.
EBITDA, however, increased 9% Q-o-Q to Rs 3,770 crore, driven by strong 15% QoQ growth in volumes (largely exports). We expect EBITDA/t to improve substantially in Q4 as price hikes have materialised in the past three months. TSE reported its worst-ever quarterly performance with an EBITDA loss of Rs 9.6 b, implying EBITDA/t loss of $57 (v/s profit of $10 in 2QFY20 and $56 in 3QFY19). While EBITDA is likely to recover in 4Q given better steel spreads, the purchase of carbon credits would put a lid on profits. Volumes rose 21% Q-o-Q to 1,260 kt, led by exports.
EBITDA declined 46% Q-o-Q to Rs 240 crore (implying a 55% Q-o-Q decline in EBITDA/t to Rs 2,252) due to lower realisation and a weaker mix (higher exports). Gross debt reduced by Rs 33.7 billion in the quarter, supported by the release of working capital. Net debt also declined to $15 billion. FY20 consol capex guidance has been raised to Rs 9,000 crore (from Rs 8,300 crore) on account of completion of committed capex.