While pressure on volumes and realisation is expected in near term, company will gain most from demand revival; ‘Buy’ maintained.
Tata Steel’s (TSL’s) Q4FY20 operating performance was marred by COVID-19 woes. Key highlights: i) Domestic volume fell 15-19% across business segments, though Tata Steel Europe (TSE) fared better; ii) inventory build-up evident; and iii) possible uptick in exports volume (fetching lower realisation) is likely to impact profitability. Going ahead, we expect sustained near-term pressure on volumes and realisations owing to lockdown woes and progressively lower export prices, respectively. Maintain Buy with TP of Rs 335, implying 7.0x June 2021E EBITDA.
Volume dip in profitable domestic operations a concern
TSL’s Q4FY20 operating performance was tepid. Domestic volumes at standalone operations (down 18% YoY to 2.91mt) and Tata Steel BSL (down 15%YoY at 0.98mt) came 6% and 5%, respectively, lower compared to our estimates. However, TSE volume (down 8% YoY to 2.37mt) was 9% ahead of our estimate. Key highlights: 1) Low capacity utilisation at steel-making facilities and suspension of operations at downstream facilities; 2) possible inventory build-up of 0.4-0.5mt in Q4FY20 at standalone operations; and 3) relative outperformance of TSE possibly due to lower imports from China, resulting in higher market share for local players. Taking cognisance of Q4FY20E volumes, we revise our Q4FY20E EBITDA down 9% to Rs 35.6 bn.
Further challenges on horizon
We see performance worsening in H1FY20 led by: 1) demand dip in domestic market; 2) lower exports realisation (down 25% compared to Q4FY20); and 3) sustained weakness in domestic prices owing to destocking. Furthermore, we expect TSE to make loss at operating level in FY21. We expect recovery only by Q4FY21.
Outlook: Near-term concerns weigh
Lacklustre Q4FY20 volumes indicate a bleak FY21 for TSL. However, we also expect TSL to benefit the most from demand recovery due to focus on value-added products. We maintain ‘BUY/SO’ with TP of Rs 335/share. The stock is trading at 6.8x FY22E EBITDA.