Tata Steel Rating: buy-Another strong quarter for the company

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Updated: November 16, 2021 7:51 AM

Ebitda at a new peak; steel prices face risk but India margins to hold well above past levels; FY22-23e EPS up 6-15%; ‘Buy’ retained

tata steelTATA's Q2 EBITDA was 13% below JEFe mainly due to lower-than-expected India margins.

TATA delivered a strong Q2 with EBITDA up 1.7x YoY (+2% QoQ) to an all-time high of `Rs 165 bn. It expects realisations to improve further in Q3 although higher coking coal will have a bearing too. We expect India margins to contract sequentially but settle well above past years; deleveraging should also pick up pace in H2. China’s steel demand outlook has weakened, but production cuts should support market balance. We raise FY22-23E EPS by 6-15% and retain Buy.

Another strong quarter: TATA’s Q2 EBITDA was 13% below JEFe mainly due to lower-than-expected India margins. Standalone, including BSL, volumes rose 11% QoQ but EBITDA was flattish QoQ as EBITDA/t fell 9% QoQ. TSE volumes fell 8% QoQ but EBITDA/t rose by $121 QoQ to $211. Pre-exceptional PBT rose 8% QoQ (+5.2x YoY). Despite working capital pressure from higher steel prices, net debt fell by 9% in H1.

Clouds on China demand: Property sector concerns and power shortages amid an already weakening macro have clouded Chinese metal demand outlook. However, a likely shift to easier policies and a potential infrastructure boost could provide cushion. Supply side is turning favourable with China intensifying production cuts. Steel output was down 22% YoY in Sep-Oct; Oct steel net exports fell 8% MoM.

Steel prices at some risk: Chinese export steel price held up well around $1,000/t over May-Aug’21 but has since fallen 20% to $815/t. Indian flat steel price, conversely, has climbed to Rs 72K/t and is now at ~5% premium to landed imports from China. Indian prices could face some pressure if Chinese export prices continue to weaken; however, our estimates already factor in a fall to Rs 62K/t in FY23, 14% below spot. Near term, TATA expects Q3 realisations to rise ~Rs 2K/t QoQ in India and €50-55/t QoQ in TSE.

India margins to hold well above past years: We expect TATA’s standalone margins to contract from Q2 level on higher coking coal cost and our expectation of a steel price fall in CY22. We still expect standalone EBITDA/t of Rs 26K/25K in H2FY22/FY23, well above the FY05-21 peak of Rs 18K/t (Q2: Rs 30K/t). For TSE, our estimates factor in EBITDA/t of $180/75 in H2FY22/FY23 (H1: $147). We expect deleveraging to pick up pace in H2; we factor in net debt falling Rs 83/sh in H2FY22 and a further Rs 178/sh in FY23.

Retain Buy: We upgrade FY22-23E EBITDA by 4-5% and EPS by 6-15%. While the uncertainty on Chinese steel demand is an overhang, TATA’s 1.3x FY23E PB is reasonable vs 2010/2018 peaks of 2.2x/1.8x as FY23E ROE of 21% should exceed past peaks of 17-19%. We retain Buy with Rs 1,600 PT.

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