Tata Steel's Q4FY18 results (Outperformer) - High steel prices fuels growth
Q4FY18 result Highlights- in line operating performance
- Tata Steel reported consol EBITDA of Rs64.9bn (IDFCe: Rs62.3bn), up 14% qoq, driven by robust performance by Tata Steel Europe.
- Tata Steel India (TSI) reported EBITDA of Rs 48.1bn, up 4% qoq, and EBITDA/t of Rs15,872, up 13% qoq. Steel realisation was up by ~Rs5,000/t qoq. The results could have been better but was affected by operational issues at Kalinganagar which led volume to decline by 8% qoq to 3.03mt. This leads to higher purchase of power and stores & spares along with higher maintenance cost. Employee cost too was up 23% qoq to Rs14.1bn due to increased provision of wage cost for CY18.
- Tata Steel Europe (TSE) reported EBITDA of RS 11.5bn (IDFCe: Rs11.2bn), up 83% qoq driven by high steel prices and absence of one off cost which was incurred during Q3FY18 on account of shutdown. EBITDA/t stood at US$70 v/s US$40 in Q3FY18. The results could have been even better but was affected adversely due to operational issues at its hot strip mill which led to adverse product mix. At its South-East Asia operations, EBITDA declined to Rs950m from Rs1.84bn in Q3FY18 due to lower spreads.
Positives: Higher steel prices, TSE EBITDA/t improves to US$70
Negatives: Lower volume at TSI, higher CoP
Impact on financials: Increase FY19/FY20 EBITDA by 4% each to factor in higher steel prices
Valuation: reiterate Outperformer with a TP of Rs857
The next quarter for TSI & TSE will improve due to better spreads, higher volume and absence of higher maintenance cost. We believe Tata Steel’s strategy of creating a JV with ThyssenKrupp (expected to be finalised by Q4FY19) is a long-term positive as the JV will be financially self-sustainable. We have not factored in the proposed acquisition of Bhushan Steel in our SoTP value, pending final acquisition and details thereof. The higher EBITDA is more than offset by higher tax rate and capex. As a result, we reduce our TP marginally to Rs857. We value the Indian operation at 6.5x FY20E EV/EBITDA (Rs728/sh) and take a 50% equity value of the proposed JV (Rs130/sh) to arrive at a target price of Rs857. We reiterate out Outperformer rating on the stock.
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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