Q1 adj. Ebitda fell 32% q-o-q, in line with our estimates, as India Ebitda miss offset TSE (Tata Steel Europe) Ebitda beat. Net debt was higher than estimates. We lift FY18-19e Ebitda by 3%. Higher regional steel prices have lifted domestic prices, but this should reverse. TSE margins are down vs. Q4 and may ease further. Expectations from potential TKA (Thyssenkrupp) joint venture remains lofty, while pension haircut may partly offset synergy gains. Valuations at 7.4x FY18e Ebitda appear full. Retain Underperform.
Q1 Ebitda in line with expectation
Group Ebitda ex Fx gains (Rs 5.4 bn) was Rs 44.3 bn, in line with our Rs 44.5 bn est. India Ebitda fell 32% q-o-q to Rs 29.7 bn (2% miss), but TSE Ebitda (-34% q-o-q) was 10% ahead of our estimates. Despite getting Rs 37.8 bn from Tata Motors stake sale, net debt fell marginally to Rs 717 bn (Q4 Rs 724 bn) due to working cap increase.
India Ebitda disappoints
Ebitda/tonne fell Rs 2,800/ton q-o-q to Rs 10,786/ton (Jeff Est. Rs 11,000/ton). ASP (down Rs 363/ton q-o-q) was better than expected, but costs were higher. Ferro alloy Ebitda dropped 72% q-o-q. Domestic mills have hiked prices by Rs 1,700-2,000/ton from recent lows. Yet spot prices are near Q1 average as per our estimates. Recently rally in regional prices is supportive near term, but we believe this would not sustain.
TSE Ebitda surprises positively
Volume fell 16% q-o-q to 2.4 mn tons (9% miss). Ebitda/ton fell $22/ton q-o-q to $81/ton (Jeff Est. $66/ton). Management expects 2H CY17 margins to be softer. Europe steel spreads have held up, led by better demand, trade measures and high spreads at Chinese mills. Lagged EU spreads have edged up, which may support margins near term. But spot spreads are down from peak. We expect Chinese spreads to normalise. This could weigh on TSE spreads. We forecast Ebitda/ton of $69/71/t over FY 18-19e.
Pension deal imminent
Discussions with stakeholders regarding Pension separation (RAA) is in advanced stages. Final agreement may be reached soon. This may clear hurdle around potential Tata TKA JV, but cash outflow of £550 m (not in our est.) would lift net debt and partly offset potential deal synergy gains.
We lift our Ebitda est. by 3-4% as we lift our India/TSE Ebitda. We also lift our net debt forecast. Our revised price target of Rs 440 (Rs 414) is based on SOTP valuation. We value India operations at 6.5 x FY1E Ebitda and TSE at 6x FY1 Ebitda. Upside risks: Higher prices, higher TSE margins. Downside risks: Lower steel prices, higher BS stress.
Analyst call highlights
Group results: Tata reported group Ebitda of Rs 49.7 bn in June quarter. Excluding Fx gain of Rs 5.43 bn, adjusted Ebitda was Rs 44.3 bn. India Ebitda was down 32% q-o-q, 2% below our estimate. However, TSE Ebitda surprised positively and was 10% ahead of our estimate. Net debt surprised negatively. Despite realising Rs 37.9 bn from sale of Tata Motor’s stake, net debt fell only marginally to Rs 717 bn. This was partly due to increase in working capital due to increase in inventory in June quarter as domestic sales were affected by de-stocking ahead of GST.
India: Management indicated that volumes were affected by destocking ahead of GST. Also drop in CV volumes has impacted steel consumption by autos segment. Ferro Alloy profits dropped sharply as expected. We estimate drop in ferro alloy profit accounted for Rs 1,300/ton of decline in standalone Ebitda in June quarter. Standalone Ebitda/ton, i.e., steel Ebitda was Rs 10,168/ton in June quarter vs Rs 11,765/ton in March quarter.