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Tata Steel's Q4FY19 results (Outperformer) - Deleveraging on; Europe JV delays

Q4FY19 result Highlights- Higher volume, lower CoP offset price fall

Tata Steel reported better-than-expected adj EBITDA of Rs73.1bn, up 1% qoq (6% higher than IDFCe). The entire beat was from European operation which inturn was due to lower CoP.

• Tata Steel India (TSI) reported marginally lower-than-expected adj EBITDA of Rs48.75bn (IDFCe: Rs50.3bn after Tata Steel BSL numbers), flat qoq despite sharp decline in steel prices (down ~Rs3,500/t qoq).  Higher volumes (up 20.5% qoq to 3.58mt) due to lower base and restocking demand at consumers’ end along with lower CoP offset lower steel prices. Profitability stood lower with EBITDA/t of Rs13,619 v/s Rs16,404 in Q3FY19.
• Tata Steel Europe (TSE) surprised positively with adj EBITDA of Rs11.9bn (adj for one-off of Rs5bn related to sale of land and carbon credits), up 26% qoq.  Adj EBITDA/t stood at US$66 v/s US$56 in Q3FY19 (IDFCe – US$38). A 9.4% qoq increase in volume (2.57mt) along with lower CoP offset decline in steel prices.
• Net debt reduced by Rs61.7bn qoq to Rs972bn at Q4FY19-end. Approx Rs20bn reduction was due to MTM forex gain while working capital release and cash flows helped in reducing remaining debt.

Positives:  Higher volumes, lower CoP, debt reduction

Negatives: Lower steel prices

Impact on financials: FY20 net debt reduced by 8%, FY21 by 5%

Valuation: Reiterate Outperformer with a revised TP of Rs681

We expect Q1FY20 EBITDA to be lower sequentially due to lower volumes which inturn is due to seasonality. However, profitability will be higher on a qoq basis due to higher steel prices (up by ~3% qoq) and lower RM cost. Though there is a delay in forming European JV with ThyssenKrupp but should be concluded within CY19. Domestic industry is requesting the government to impose safeguard duties so as to restrict imports at a lower price from FTA countries. Any positive development on this will be beneficial for Tata. Tata’s focus on deleveraging is encouraging with net debt of ~Rs972bn at FY19-end. We expect debt to reduce by Rs75bn over FY21 to Rs897bn (incl TSE debt).  With lower debt, we revise our target price to Rs681 (earlier Rs626). We value the Indian operation at 6.0x FY20E EV/EBITDA (Rs636/sh) and the proposed European JV at 50% equity value (Rs45/sh). We reiterate our Outperformer rating on the stock.