MOSL: TATA STEEL (Neutral)- Europe underperformance drives miss
TATA STEEL: Europe underperformance drives miss
(TATA IN, Mkt Cap USD7.5b, CMP INR471, TP INR450, 4% Downside, Neutral)
Better steel prices to drive margin improvement, but challenges remain
- Tata Steel's (TATA) third-quarter result reflects the challenges faced by the industry, with consol. EBITDA/ton of INR3,614 dropping to the lowest level in the past 15 quarters due to a sharp decline in steel prices. TATA thus reported a consol. PBT loss for the first time in 16 quarters.
- Prices have recovered sharply over the past three months, strengthening the margin outlook. Given the challenges in the European business, we cut our FY20/21 EBITDA estimates marginally and maintain Neutral.
Weak EBITDA due to lower steel price, losses in Europe
Consol. EBITDA declined 5% QoQ (-46% YoY) to INR36.2b (our estimate: INR38.2b) in 3QFY20 due to weak steel spreads and higher exports from India. Consol. PBT loss stood at INR5.6b (our estimate: INR80m loss), including INR3.3b extraordinary expense. Consol adj. PAT loss was at INR7.0b (our estimate: INR3.7b loss).
- Standalone: EBITDA/t was down 6% QoQ at INR11,020 due to lower realization (-11% QoQ to INR44,522/t) and the higher share of margin-dilutive exports (18%). EBITDA, however, increased 9% QoQ to INR37.7b, driven by strong 15% QoQ growth in volumes (largely exports). We expect EBITDA/t to improve substantially in 4Q as the price hikes have materialized in the past three months - we expect INR13,800 in 4QFY20.
- Tata Steel Europe (TSE): TSE reported its worst-ever quarterly performance with an EBITDA loss of INR9.6b, implying EBITDA/t loss of USD57 (v/s profit of USD10 in 2QFY20 and USD56 in 3QFY19). While EBITDA is likely to recover in 4Q given better steel spreads, the purchase of carbon credits would put a lid on profits.
- Bhushan: Volumes rose 21% QoQ to 1,260kt led by exports. EBITDA declined 46% QoQ to INR2.4b (implying a 55% QoQ decline in EBITDA/t to INR2,252) due to lower realization and a weaker mix (higher exports).
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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