MOSL: TATA STEEL (Neutral)-Strong operating performance-Strong markets have given flip to FY18 outlook
​Tata Steel: Strong operating performance; Strong markets have given flip to FY18 outlook
(TATA IN, Mkt Cap USD8.7b, CMP INR600, TP INR591, 1% Downside, Neutral)
- Tata Steel (TATA) reported strong 1QFY18 consolidated EBITDA of INR49.7b (est. INR38b). Operating EBITDA of India (TSI) was in-line at INR29.7b. TSE (Europe) and forex gains in raw material SPVs surprised positively.
1QFY18 highlights:
- TSI sales increased 28% YoY to 2.75mt. EBITDA per ton declined 21% QoQ to INR10,786/t on lower margins in FAMD & steel business.
- TSE reported strong EBITDA of INR12.5b and EBITDA/t of USD81/t (est. USD48)
- Other Subsidiaries contribution was strong at INR7.5b aided by forex gains.
Upgrading FY18E EBITDA on strong markets; Maintain Neutral
- TSE margin outlook has improved significantly on exit from all of non-strip businesses, depreciation of GBP, de-risking of pension and anti-dumping action against Chinese imports. Margins in 2Q and 3QFY18E are likely to lower due to seasonal factors.
- TSE is in final stages of de-risking pension scheme.
- Strong international market is helping balance domestic supply and pricing power to offset cost increase. We expect margins to be stronger during 2Q & 3QFY18E. Therefore, we are raising FY18E est. by 6% to INR144b EBITDA. We are also raising TSE& other subs. estimate by 18% to INR64b EBITDA. Thus, consolidated EBITDA is increased by 12% to INR208b for FY18E.
- Global steel market has been trending strong on easing pressure from Chinese exports, which has boosted margins in FY18E. But, we are not sure about its sustainability in FY19E. Therefore, we keeping FY19 estimates unchanged. Target price is increased marginally to INR591/share. Maintain Neutral.
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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