TATA has been a key beneficiary of rising steel prices. While margin in India has been strong in the last few quarters, Europe should see a sharp jump, with Ebitda/t expected to cross $250/t by Q3FY22. The deleveraging cycle should continue, with consolidated net debt expected to fall by 32% y-o-y to Rs 565 bn (0.8x Ebitda) in FY22. Consolidated Ebitda rose 14% q-o-q to Rs 161.1 bn (highest ever) in Q1FY22. PAT Rs 82.7 bn).

We raise our FY22e/FY23e Ebitda estimate by 16% each to factor in an improved outlook for Europe. We, however, rate stock Neutral as it is trading at an EV/capacity of $1,064/t, a premium of ~50% to its past five-year average.

Pricing boosts Ebitda to a record high

Consolidated revenue/Ebitda/adjusted PAT increased by 7%/14%/19% q-o-q to Rs 533.7/161.1/90.9 bn and was 2%/ 6%/7% below our estimate in Q1FY22.

Standalone: Ebitda rose 11% q-o-q to Rs 102.5 bn, despite a 13% decline in volume (2.87mt). This was on the back of a 13% q-o-q improvement in realisation to Rs 72,468/t, which boosted Ebitda by Rs 7,750/t to Rs 35,558/t.

Tata Steel Europe (TSE) disappointed with Ebitda 42% below our estimate at Rs 15.3 bn (though up 28% q-o-q). Ebitda/t improved by just $22/t q-o-q to $88/t, despite a $155/t increase in realisation and lower carbon credit costs. This was due to higher raw material and employee cost, and a one-time repair and maintenance cost of Rs 2.5 bn.

Tata Steel BSL had earlier reported an Ebitda of Rs 30.9 bn, up 21% q-o-q, on the back of higher realisation (+14% q-o-q) at Rs 70,226/t. Ebitda stood at Rs 27,648/t, up 28% q-o-q.

Reversal in working capital, due to higher finished goods inventory and payment of carbon credits, led to low FCF generation of Rs 35.5 bn. Working capital increased by Rs 82.7 bn q-o-q. As a result, reported net debt declined by Rs 14.2 bn q-o-q to Rs 739.7 bn.

Valuation and view

With captive iron ore availability, TATA’s Indian operations are a play on steel prices. Given the prevailing high prices, we expect margin to remain strong. We estimate Q2FY22 Ebitda at Rs 200 bn (+23% q-o-q), with standalone Ebitda/t of Rs 36,574/t (record high). While TSE’s Ebitda should be strong in FY22, sustenance would be key to meeting its cash outflow requirements. Deleveraging should remain strong, despite the resumption of growth capex. We expect net debt to decline by ~Rs 260 bn in FY22e to Rs 565 bn.

We arrive at our TP of Rs 1,565/share, based on FY23e EV/Ebitda of 5x/4x for its India/Europe operations. Our TP implies an EV/capacity of $1,064/t, a premium of ~50% to its past five year average of ~$700/t, which prices in deleveraging from the upcycle. We, therefore, rate it Neutral.