Tata Steel rating | Add — Subsidiaries pulled down performance

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Published: November 16, 2019 2:46:51 AM

We increase our target FY21e multiple for India business to 6x from 5.5x to upgrade the valuation to historical mean level in midst of the down-cycle. Revise TP to Rs 444 (Rs 422 earlier) based on 6x/5x FY21 domestic/international business EV/Ebitda, which implies 10% upside. Retain Add rating.

Tata Steel, Tata Steel rating, market news, Tata Steel news, tata sponge, Tata Steel share, Tata Steel nse, Tata Steel ltdRevise TP to Rs 444 (Rs 422 earlier) based on 6x/5x FY21 domestic/international business EV/Ebitda, which implies 10% upside.

Q2FY20 consolidated EBITDA came in at Rs 38 bn (down 48%/29% y-o-y/q-o-q) vs. our/consensus estimate of Rs 46/44 bn due to weak performance of Indian and global subsidiaries. Realisation decline is in line with the industry. We revise our FY20/21e EPS to Rs 56/41 (Rs 51/55 earlier) as we (i) reduce benchmark steel prices by 5% and domestic premium by 3% each; (ii) cut domestic volume estimate by 3%/1%; and (iii) lower European spread; however, deferred tax liability reversal will offset the effect for FY20.

We increase our target FY21e multiple for India business to 6x from 5.5x to upgrade the valuation to historical mean level in midst of the down-cycle. Revise TP to Rs 444 (Rs 422 earlier) based on 6x/5x FY21 domestic/international business EV/Ebitda, which implies 10% upside. Retain Add rating.

Domestic – H2 realisation to be weaker: Standalone Ebitda/t declined by only Rs 1,500 q-o-q to Rs 11,700 on moderation in other expenses (declined Rs 2,200/t on forex adj). However, realisation dropped Rs 3,500/t q-o-q to Rs 50,000 on (i) reduced auto sales; (ii) higher exports; and (iii) weakness in steel prices. We believe H2 realisation will be weaker as (i) current steel prices are lower by `2,000 vs. Q2 average; and (ii) bi-yearly auto contracts for H2 are up for renewal. Management indicated prices will be broadly based on current prices, while previous prices were of April. HRC prices in October are ~18% lower than in April, and ~15% of total volumes cater to auto segment. We estimate Rs 2,000-2,500 q-o-q drop in cost for Q3 due to lower coking coal and royalty on iron ore.

Tata Steel BSL shrinks: Ebitda at Rs 4.8 bn vs. Rs 7.9 bn in Q1. We believe the fall was due to high-cost inventories of Q1 sold in Q2 during plant shutdown period and higher exports. Inventory levels continue to remain high at BSL.

Europe weak: Ebitda at Rs 17 bn, down 85% y-o-y, as steel spread compressed due to (i) sluggish demand; (ii) weak steel prices; and (iii) higher imports. We believe the weakness will continue and Q3 is also seasonally weak for Europe.

Tata Sponge: In Apr’19, Tata Sponge acquired the steel business of Usha Martin. Ebitda loss at Rs 400 mn vs. profit of Rs 550 mn q-o-q, as realisation was down with lower sponge and long steel prices.

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