MOSL: TATA STEEL (Neutral)-Missed estimates on squeeze in spreads-FCF still missing- net debt up INR60b in 1HFY18
​Tata Steel: Missed estimates on squeeze in spreads; FCF still missing; net debt up INR60b in 1HFY18
(TATA IN, Mkt Cap USD10.8b, CMP INR719, TP INR672, 6% Downside, Neutral)
- Tata Steel's (TATA) 2QFY18 consolidated EBITDA increased 59% YoY to INR47.2b, but missed estimates by 11% due to lower margins both in India and Europe. Sales volumes increased 14% YoY to 6.5mt. EBITDA per ton rose 42% YoY to USD112 (est. of USD127). Despite strong EBITDA and sale of shares in group companies, net debt increased by INR60b to INR805b on working capital increase, INR37b capex, and GBP550m payout to British Pension Fund in 1HFY18.
- Tata Steel India's (TSI) sales volumes increased 17% YoY to 3.1mt, aided by ramp-up at Kalinganagar (KPO). Although steel realization was flattish QoQ, reported NSR declined on lower ferro chrome prices and certain changes in reporting post the implementation of GST.
- Tata Steel Europe's (TSE) sales volumes increased 13% YoY to 2.6mt on liquidation of 190kt slabs. Margin contracted 45% QoQ to USD44/t, which was sharper than our estimate of USD76 on shrinkage in spreads. The spreads have now improved in Europe, but the benefit will be realized in 4QFY18 as 3Q gets impacted by negative operating leverage. South East Asia and other segments reported strong INR6b EBTIDA.
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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