Management Speak: Tata Steel (Outperformer) - Leveraged but growing
We present key takeaways from our recent meeting with Tata Steel.
Proposed JV not impacted: Tata Steel emphasized that the company will forge ahead with the proposed European JV (between Tata Steel Europe and ThyssenKrupp), notwithstanding the resignation of ThyssenKrupp’s CEO. The company recently signed a definite agreement and expects to finalise the deal between Dec 2018 and Mar 2019 without any further negotiations. The move will make the European JV a financially self- sustainable company.
Acquisition spree continues in India: The company reiterated that it will pursue growth opportunities in India. Post-acquisition of Bhushan Steel and proposed brownfield expansion of Kalinganagar plant by 5mtpa, the company has a clear visibility to touch ~24mtpa steel capacity in India by FY2022. Besides, Tata Steel is one of the two bidders which are in the race to acquire Bhushan Power & Steel with a crude steel capacity of ~2.5mtpa. The deal is expected to be cleared within a month.
Working to supply iron ore to Bhushan Steel: Tata Steel currently has surplus iron ore capacity of ~3mtpa. The company is engaged with regulatory authorities to allow Tata Steel to supply iron ore to Bhushan Steel’s plant. Although the supply would be on arm length pricing, the consolidated entity would be benefitted as a whole, as it would add ~Rs9bn to consolidated EBITDA, assuming current iron ore prices.
Leveraged balance sheet but capable of servicing debt: Tata Steel will continue to have a leveraged balance sheet with net debt of ~Rs1,067bn as at Q1FY19-end. While the company’s cash flows will be sufficient to service the debt, it would reduce the equity value. We estimate net debt of ~Rs1,000bn in FY22E factoring in 1) expansion plans at Kalinganagar (capex of Rs235bn), 2) assuming the European JV goes through and 3) Tata acquires Bhushan Power. The company has a long-term net debt/EBITDA target of 3-3.5x.
Valuation & view: We believe negatives like Bhushan Power acquisition, 8-10% fall in steel prices, etc, are already in the price and we thus advise buying on declines. We await clarity on acquisition of Bhushan Power, post which we would change our estimates. We reiterate Outperformer on the stock with a target price of Rs755, valuing Tata Steel ex-Europe at 6.5x FY20E EV/EBITDA (Rs659/share); we have taken 50% equity value of the proposed European JV (Rs96/share).
Tata Steel is primarily engaged in the manufacturing of steel and its related products. Through its joint ventures, Co. is also engaged in iron ore and coal exploration and mining activities. Co.'s products include hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction rebars and bearings. Co.'s products are sold under the following brand names: Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Bearings, Tata Agrico, Tata Wiron, Tata Pipes and Tata Structura. Apart from these product brands, Co. also has in its folds a service brand called "steeljunction".
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