One-offs inflate PAT: Tata Steel’s Q1FY16 volumes for the India operations were 5% below our estimates, but European business volumes were 8% above our estimates. With the normalisation of iron ore costs for the India operations, standalone Ebitda/tonne was at R7,891/tonne, up 13%quarter-on-quarter and broa-dly in line with our estimate. But forex losses led to a decline in Europe business Ebitda/tonne to $27/t in Q1FY16 vs $44/t in Q4FY15.
However, despite the weaker-than-expected Ebitda at the Indian as well as European operations, consolidated Ebitda was 12% above our estimate due to stronger Ebitda at Tata Steel’s smaller subsidiaries and translation gains. Further, one-off gains below Ebitda on the back of sale of investments (shares in Titan, Tata Projects, etc.) resulted in reported consolidated profit after tax of R7.6 bn vs our estimate of a loss of R4.6 bn.
We retain our negative outlook for steel prices due to rising imports from China, which have further aggravated with the devaluation of the Chinese currency. We reiterate Sell.
Results overview: Tata Steel reported Q1FY16 consolidated revenues of R303 bn, down 17% y-o-y and 10% q-o-q but 2-4% above our and consensus expectations. Tata Steel India’s sales volume of 2.14mt was down 11% q-o-q and European business sales volume of 3.44mt was also down 10% q-o-q, as Q4 is the seasonally strongest quarter. However, consolidated Ebitda of R27.7 bn was up 80% (from R15.4 bn in Q4) mainly due to stronger Ebitda at Tata Steel’s smaller subsidiaries in Q1 (R3.46 bn vs loss of R2.7 bn in Q4) and translation gains of R1.7 bn vs loss in Q4. Due to stronger Ebitda at smaller subsidiaries and translation gain, consolidated Ebitda was 12% above our and 27% above consensus estimates.
Takeaways from results and conference call
Tata Steel India reported sales volume of 2.14mt (down 11% q-o-q), and 5% below our estimate of 2.25mt. The steel segment’s realisations decreased sequentially by R1,919/tonne (4% q-o-q) to R40,971/ tonne, mainly due to continued pressure on domestic steel prices from cheaper imports. Ebitda/ tonne recovered to R7,891/tonne, up R925/tonne q-o-q, mainly due to sequentially lower raw material costs, as iron ore costs normalised (dipped by R3,416/tonne), which were partially offset by lower steel realisations.
European business: Tata Steel Europe reported Q1FY16 sales volume of 3.44mt, (down 10% q-o-q) and 8% above our estimate of 3.2mt. Ebitda was at $27/tonne (vs $44/t in Q4FY15), mainly due to forex losses from pound sterling appreciation. Adjusting for the forex losses, Ebitda/t would be $35/t, similar to our estimate of ~$38/t for Q1FY16.
Capex and net debt: Tata Steel has incurred a capex of Rs215 bn on the Odisha expansion until June 2015, out of which Rs6 bn was spent in Q1FY16 and Rs46 bn was spent in FY15. The management has guided for FY16 capex of R100 bn vs R130 bn spent in FY15. Net debt has increased from R706 bn in Q4FY15 to R731 bn in Q1FY16, mainly due to translation loss on foreign currency debt.
Where do we go from here? The management highlighted that pressure on steel prices across India and Europe continues due to rising imports from China and has further aggravated with the devaluation of the Chinese currency. This coupled with a seasonally weaker demand period over Q2 and Q3 makes us believe that a material recovery in steel prices is unlikely anytime soon. There could be some headwinds due to production stoppages at the Naomundi iron ore mine. This coupled with continuing weakness in domestic steel prices is likely to keep margins under pressure.
We reiterate our Sell stance on the stock on the back of muted outlook for global steel demand and prices, and rising imports in India, which would keep domestic steel prices under pressure even if demand recovers in FY16.