TATA has been a crucial beneficiary of increasing steel rates. While margin in India has been sturdy in the last handful of quarters, Europe need to see a sharp jump, with Ebitda/t anticipated to cross $250/t by Q3FY22. The deleveraging cycle need to continue, with consolidated net debt anticipated to fall by 32% y-o-y to Rs 565 bn (.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 and every to issue in an enhanced outlook for Europe. We, nonetheless, price stock Neutral as it is trading at an EV/capacity of $1,064/t, a premium of ~50% to its previous 5-year typical.
Pricing boosts Ebitda to a record higher
Consolidated income/Ebitda/adjusted PAT enhanced by 7%/14%/19% q-o-q to Rs 533.7/161.1/90.9 bn and was 2%/ 6%/7% under our estimate in Q1FY22.
Standalone: Ebitda rose 11% q-o-q to Rs 102.5 bn, in spite of 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% under our estimate at Rs 15.3 bn (although up 28% q-o-q). Ebitda/t enhanced by just $22/t q-o-q to $88/t, in spite of a $155/t boost in realisation and reduced carbon credit charges. This was due to larger raw material and employee expense, and a one-time repair and upkeep expense 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 larger 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 larger completed goods inventory and payment of carbon credits, led to low FCF generation of Rs 35.5 bn. Working capital enhanced by Rs 82.7 bn q-o-q. As a outcome, 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 rates. Given the prevailing higher rates, we anticipate margin to stay sturdy. We estimate Q2FY22 Ebitda at Rs 200 bn (+23% q-o-q), with standalone Ebitda/t of Rs 36,574/t (record higher). While TSE’s Ebitda need to be sturdy in FY22, sustenance would be crucial to meeting its money outflow specifications. Deleveraging need to stay sturdy, in spite of the resumption of development capex. We anticipate 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 previous 5 year typical of ~$700/t, which rates in deleveraging from the upcycle. We, consequently, price it Neutral.