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MOSL: TATA STEEL (Neutral)-Earnings largely aided by one-offs-Margins at peak

Tata Steel: Earnings largely aided by one-offs; Margins at peak; Maintain Neutral

(TATA IN, Mkt Cap USD9.3b, CMP INR589, TP INR644, 9% Upside, Neutral)

 

Tata Steel’s (TATA) 2QFY19 consol. EBITDA increased 38% QoQ to INR89b, largely aided by one-offs (forex gains of INR9.7b and other gains of INR12.6b).  Finance cost shot up 29% QoQ (+59% YoY) to INR21b due to the full impact of acquisition debt. Net debt (incl. perpetual bonds) remained stable QoQ at ~INR1,065b. FCF was offset by forex loss of INR35b during the quarter. Adj. PAT stood at INR34b.

• Standalone: EBITDA increased 18% QoQ to INR60b, driven by a 7% increase in volumes, 2% increase in steel prices and forex gains. Adj. EBITDA/t was flat QoQ at ~INR18,000.
• Bhushan Steel reported strong sales of 1.14mt on destocking, while production was flat QoQ at 1.05mt. EBITDA stood at INR11.7b and EBITDA/t at INR10,291.
• TSE’s EBITDA declined 33% QoQ to INR11b. EBITDA per ton also declined 33% QoQ to USD70 on squeeze in spreads. Production and sales were affected by shutdowns, which led to higher cost. This, however, was offset by monetization of carbon credits.

Margins at peak; Spreads shrinking for TSE; Maintain Neutral

• Margins of India business are at peak. Coking coal prices and currency depreciation will seep into cost of production in subsequent quarters.
• Shrinking steel mills’ spreads will hurt margins for TSE (Exhibit 3). Shutdown at Port Talbot will be additional drag in 3QFY19.