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Tata Steel's Q3FY19 results (Outperformer) - Domestic focus to pay-off

Q3FY19 result Highlights- Lower volume, realisation drag EBITDA

Tata Steel reported in-line consol adj EBITDA of Rs72.3bn, down 18% qoq.

• Tata Steel India reported in-line adj EBITDA (adj of forex impact of ~Rs3.1b) of Rs48.7bn (IDFCe: Rs48.3bn), down 17% qoq due to lower volumes (down 6.7% qoq to 2.97mt), lower realisations (down Rs700/t qoq) and higher raw material costs. Volumes were lower due to destocking at consumers’ end and liquidity issues in the market. Reported EBITDA of Rs45.5b includes forex loss of Rs3.1b on account of change in fair value of its investment in Tata Steel holdings. Adjusted of forex loss, EBITDA/t stood at Rs16,404, down 11% qoq.
• Tata Steel Europe reported in-line EBITDA of Rs9.5bn, down 17% qoq due to lower realisation (down 7% qoq to US$937/t) despite 4% qoq higher volumes (2.34mt). EBITDA/t stood at US$56 v/s US$70 in Q2FY19. EBITDA includes sale of carbon credits too.
• Tata Steel BSL reported EBITDA of Rs10.1bn, down 14% qoq due to lower volumes (0.92mt, down 19% qoq), higher opex partially offset by higher realisation (up Rs1,800/t qoq) owing to better product mix in domestic market and lower exports and lower raw material cost. As a result, EBITDA/t was Rs10,954, up 6% qoq.

Positives:  Net debt reduction of Rs32bn qoq; Sale of non-core assets

Negatives: Lower volume and prices

Impact on financials: Cut EBITDA by 3% in FY19 and by 8% in FY20 to factor in lower volumes and steel prices; exclude S.E Asian operation EBITDA from FY20, Introduce FY21 estimates

Valuation: Reiterate Outperformer with a revised TP of Rs626

We believe Tata’s strategy to focus on India and exit/reduce exposure at low margin operation at South East Asia and European operation is in a right direction. Tata Steel’s profitability is expected to have peaked out in Q3FY19 and margins will compress in Q4FY19 due to lower steel prices.  Post disposition of Tata Steel’s appeal by NCLAT, we believe that TATA will not acquire Bhushan Power which will help not leveraging its balance sheet further. TATA has a net debt of ~Rs1,010bn as at Q3FY19-end and the company’s cash flows will be sufficient to service the debt. We believe steel prices have bottomed out and Tata Steel India can generate EBITDA/t of Rs14,810 in FY20e (Rs16,400 in Q3FY19). We factor in the EU JV to make EBITDA/t of US$75 (earlier US$90/t ). With cut in earnings, we lower our TP to Rs626 (earlier Rs778). We value the Indian operation at 6.0x FY20E EV/EBITDA (Rs582/sh) and take a 50% equity value of the proposed JV (Rs45/sh). We reiterate Outperformer.