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MOSL: TATA STEEL (Neutral)-Strong operating performance yet FCF negative-Bhushan acquisition is value dilutive

TATA STEEL: Strong operating performance yet FCF negative; Bhushan acquisition is value dilutive; Maintain Neutral

(tata IN, Mkt Cap USD10.5b, CMP INR622, TP INR705, 13% Upside, Neutral)

 

Tata Steel’s (TATA) 4QFY18 cons. EBITDA increased 14% QoQ to INR65b driven by expansion of margins across all regions, while volumes declined 2% on furnace breakdown in India. Finance cost increased 12% QoQ due to increase in debt. PBT before XO increased 21% QoQ to INR38b and adj. PAT increased 35% QoQ to IRN33b. Reported PAT of INR146b included INR113b of XO income on w/back of pension liabilities of INR138b and provision of INR15b for demand towards mining.

• For the fully year FY18, adj. PAT increased 118% to INR82b. Capex was INR74b. Net debt declined by just INR29b to INR716b despite strong EBITDA of INR219b and funds of ~INR90b from rights’ issue. FCF were negative at ~INR25b due to significant increase in working capital. There was translation loss of INR35b.
• Margins in S/A increased by 13% QoQ to INR15,872/t largely driven by higher steel prices after offsetting cost pressure and negative operating leverage on loss of 250kt production in Odisha.
• Bhushan Steel (BHUS) acquisition is at a total consideration of INR352b. Though TATA’s holding will be 72.7% only, it will be able to extract near full economic interest through ICD because INR560b debt on the BHUS’s balance sheet has been bought by TATA replacing lenders through novation for INR1b. Debt on BHUS’s balance sheet will remain unchanged, while equity base will increase from 227m shares to 1,093m shares. According to our calculations, the implied valuation is ~10xEV/EBITDA, which is value dilutive for TATA.