Factoring in currently low steel prices and demand outlook, we are lowering FY20/21e HRC price by 5%/2%, which knocks down Ebitda by 13%/2%. Maintain ‘HOLD/SP’ with a revised target price of Rs 430 (earlier Rs 520) on an unchanged exit 6.3x FY21e Ebitda.
Tata Steel (TSL) undershot the consensus forecast, reporting a 17% y-o-y contraction in Q1FY20 Ebitda. Key highlights: (i) Standalone Ebitda/t at Rs 12,764 is broadly in line. (ii) Tata Steel Europe’s (TSE) Ebitda/t shrivelled 96% y-o-y to Rs 273. (iii) Deleveraging continues to be a priority, even at the cost of capex. Going ahead, we expect the domestic business to stay relatively resilient (Ebitda: Rs 12,000/t), but TSE is staring at harder times. Factoring in currently low steel prices and demand outlook, we are lowering FY20/21e HRC price by 5%/2%, which knocks down Ebitda by 13%/2%. Maintain ‘HOLD/SP’ with a revised target price of Rs 430 (earlier Rs 520) on an unchanged exit 6.3x FY21e Ebitda.
TSE disappoints, outlook somber
TSL’s Q1FY20 Ebitda missed consensus forecast due to an ostensibly weaker-than-expected performance at TSE. Key highlights: (i) TSE’s Ebitda crashed owing to a plunge in spreads and unplanned outages at the profitable Ijmuiden plant. (ii) Standalone Ebitda/t dipped 25% y-o-y to Rs 12,764 driven by the automotive slowdown. We now expect a recovery only from Q4FY20 onwards given: (i) the impending seasonally lean period; (ii) continued weak operating environment in Europe; and (iii) consolidation benefits at TS-BSL and Usha Martin are likely to show up in H2FY20.
Deleveraging positive, but concerns abound on TSE
The weak operating environment notwithstanding, management intends to pare debt by $1 bn in FY20e via: (i) a 20–25% cut-back in capex; (ii) unlocking ~Rs 15 bn in working capital; and (iii) divestment of non-core assets. However, we remain wary given: (i) potential funding of TSE via Indian operations; and (ii) the likelihood of the purchase of carbon credits by TSE, which would further erode profitability.
Outlook: TSE concerns resurface
Despite resilient (and growing) domestic operations, TSE continues to be killjoy. That said, a key positive is TSL’s intent to deleverage even at the cost of capex. On balance, the risk-reward is largely in equilibrium. The stock is trading at 6.1x FY21e Ebitda.