TATA’s Q3 EBITDA rose 53% q-o-q (up 2.1x y-o-y) and was 8% above JEFe. Standalone and BSL Ebitda/t rose a sharp Rs 5-7K q-o-q on greater steel costs, while TSE margins remained below stress. Balance sheet continues to deleverage with net debt down 11% q-o-q, albeit partly due to export-connected advances. While HRC steel costs have come off from Jan peak, spot is nevertheless ~20% above Q3 and the complete advantage ought to flow in H1CY21. We retain Buy with TP of Rs 900.
EBITDA beat and deleveraging: TSE margins fell q-o-q to -$47/t, pulled down by one-off carbon provisions and reversal of government wage assistance. Recurring net profit at Rs 38 bn rose 1.5x q-o-q. TATA generated sturdy cost-free money flow of Rs 121 bn and net debt fell by Rs 103 bn (Rs 90/sh) q-o-q, albeit boosted by ~Rs 60 bn of advances on exports.
Gradual start off of capex: With the sturdy turnaround in monetary efficiency, TATA is progressively restarting capex with pellet plant and cold-rolling mill of the KPO Phase-2 project (total expense ~Rs 60 bn). TATA is but to make a decision on restarting 5mtpa brownfield expansion.
India margin outlook sturdy: Indian HRC (flat) steel costs, in spite of some current correction, are 20% above Q3 typical. Long costs have noticed a sharper correction although on easing demand-provide balance. TATA’s India realisations ought to strengthen additional in Q4 (TATA expects +Rs 6-7K/t) as the complete advantage of greater spot and contract costs flows by way of. Our estimates assume a meaningful moderation in HRC costs to Rs 48-49K in FY22/FY23, 13-14% under spot. Access to captive iron ore is a positive amid elevated ore costs, while international coking coal costs have risen of late. We anticipate Tata’s standalone Ebitda/t of Rs 23K/18K/Rs 17K in Q4FY21/FY22/FY23.
Europe enterprise H1FY21 outlook superior but issues stay: JEF’s European steel analyst believes that the macro atmosphere and market place balance are supportive for the steel business in the area in H1CY21. N. European HRC costs have continued to rally in the final couple of months and close to-term steel S/D seems tight as mill lead occasions are nicely into Q2. However, imports are turning desirable and could soften costs in H2CY21. TSE margins ought to strengthen in coming quarters but the medium-term challenges stay, in particular with tightening carbon regulations.
Retain Buy: We upgrade FY22 Ebitda by 9% and EPS by 18% on greater steel costs, but broadly retain our FY23 estimates. After 41% y-o-y Ebitda decline in FY20, we see 30-47% development in FY21-22. We anticipate deleveraging to continue in FY22-23 while at a slower pace than 9MFY21. Stock has nearly doubled considering that finish-Sep, outperforming Nifty by ~60% nonetheless, its 1.0x FY22e PB is nevertheless in line with the lengthy-term typical. We retain Buy rating with a Rs 900 TP based on 6.0x and 4.0x FY22 EV/Ebitda for India and TSE, respectively.