Tata Steel Rating: Earnings were in line with estimates

Sharp cut in debt in Q4; Ebitda for FY23/24e raised by22/8%;target price up to Rs 1,660; valuations are attractive; ‘Buy’ retained

TATA’s internal cash-flows would comfort- ably meet its growth ambitions

Tata Steel’s Q4FY22 earnings were in line with our estimates while sharp deleveraging and buoyant margin guid- ance were encouraging. Management shared that price hikes, both in India and Europe, should offset the cost inflation in Q1FY23e. Working capital release led to sharp deleveraging in Q4FY22 and helped end FY2022 at 0.9X net debt/Ebitda.TATA has multiple high IRR brownfield growth opportunities and with leverage well under control, we expect a step-up in growth capex from FY2024e.We upgrade earnings and FV to `1,660. Maintain ‘Buy’.

Q4FY22: In-line earnings

TATA’s Q4FY22 consolidated Ebitda at Rs 157 bn was 4% below our estimate, mainly led by FX translation losses whereas operating performance was in line with our estimates. India margins softened sequentially on higher costs while Europe margins improved sequentially on higher pre-contracted prices, partially offset by higher coking coal prices. Management guidance suggests that margins in India and Europe would remain stable q-o-q in Q1FY23e as higher costs(primarily coking coal)would be offet by higher realisations.

India – Ebitda declines on cost pressures: Standalone Ebitda (including Bhushan). of flaty-o-y,-4%q-o-q) or `23,415/ton (-10% y-o-y, -18% q-o- q)23,415/ton (-10% y-o-y, -18% q-o- q) was led by higher costs (higher coking coal), partly offset by 21% y-o-y higher realisations. Sales volumes increased 10% y-o-y (+17% q-o-q) with higher exports, 15% of the overall sales (12% in Q3FY22). Europe – Ebitda/ton increases on higher prices: Ebitda of $241/ton increased sequentially versus $184/ton in Q3FY22, on higher contracted prices and lower iron ore costs, partially offset by higher coking coal costs. The ongoing Russia-Ukraine crisis has constrained traditional steel supply into Europe and should be positive for TSE.

Leverage to remain under control

TATA’s internal cash flows would comfortably meet its growth ambitions and keep leverage under control. In the past two years, TATA has reduced net debt by `473 bn or Rs 388/share and net debt/Ebitda to 0.9X in FY2022 from 6X in FY2020. The NINL acquisition is likely to complete in Q1FY23E and mgmt is working on its medium-term goal of reaching 40 mtpa capacity in India. Despite spends, we note that TATA’s net debt/Ebitda would remain <1.5X over FY2023-25E led by strong operational cash flow.

Risk-reward remains favourable

We factor in higher steel prices and higher coking coal costs in our earnings and increase Ebitda estimates by 22%/8% for FY2023/24E. Our FV is increased to Rs 1,660 (from Rs 1,500) on higher earnings and rollover to March 2024E. The stock trades at attractive 4.2X EV/Ebitda FY2023e despite assuming further moderation in margins. Maintain ‘Buy’.

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