Tata Steel's Q3FY18 results (Outperformer) - India operation improves
Q3FY18 result Highlights- TSI shines while TSE dips
- During Q3FY18, while Indian operation’s (TSI) EBITDA were higher-than expected, lower-than-expected EBITDA from Europe (TSE) led to in-line consol EBITDA.
- Tata Steel India (TSI) reported EBITDA of Rs 46.3bn, up 37% qoq, driven by higher prices (up ~3% qoq i.e. Rs1,330/t) & volumes (up 7% qoq to 3.3mt) coupled with lower coking coal cost (down USD10/t qoq to USD144/t) and liquidation of inventories in Q3FY18. Added to it, its ferro alloys division profit was up ~50% qoq to Rs2.95bn due to lower cost. As a result, TSI reported an EBITDA/t of Rs14,037, up 28% qoq.
- Tata Steel Europe (TSE) performance was affected due to higher maintenance cost during plant shutdown, lower volume (down 6% qoq to 2.44mt) due to seasonality and adverse product mix. As a result, despite improved steel spreads, it reported EBITDA/t of US$40, down 11% qoq. We observe the 3rd consecutive qoq decline in European performance which is expected to be reversed in Q4FY18. At its South-East Asia operations, EBITDA improved to Rs1.84bn, up 36% qoq due to better spreads.
Positives: Higher steel prices, volumes and lower COP qoq in India
Negatives: TSE EBITDA/t dips to US$40
Impact on financials: upgrade FY19E EBITDA by 12% due to higher steel prices; introduced FY20E; factored in 24% equity dilution on account of proposed rights issue wherein company will raise Rs128bn
Valuation: reiterate Outperformer with a TP of Rs873
The next quarter for TSE will improve due to better spreads and absence of higher maintenance cost. TSI’s EBITDA, too, will improve qoq in Q4FY18 due to higher spreads. The improved spread along with cost control will lead India operation’s EBITDA to increase at a CAGR of 14% over FY17-20E. We believe Tata Steel’s strategy of creating a JV with ThyssenKrupp is a long-term positive as the JV will be financially self-sustainable. We have not factored in any probable acquisition of distress steel assets in India. We rollover our valuation to FY20E earnings. We value the Indian operation at 6.5x FY20E EV/EBITDA (Rs743/sh) and take a 50% equity value of the proposed JV (Rs130/sh) to arrive at a target price of Rs873. 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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