MOSL: TATA STEEL (Sell)-Market volatility impacts volumes and margins-Expect continued margin pressure
Tata Steel: Market volatility impacts volumes and margins; Expect continued margin pressure; Maintain Sell
(TATA IN, Mkt Cap USD7.4b, CMP INR470, TP INR370, 21% Downside, Sell)
Consol. EBITDA declined 25% QoQ to INR67b in 3QFY19, led by lower volumes globally and the shrinkage in spreads in standalone (S/A), Europe (TSE) and South East Asia (SEA). Net debt declined by INR29b QoQ to~INR1,010b due to translation gains. Adj. PAT declined 35% QoQ to ~INR23b (up 61% to INR80b for 9MFY19).
- Standalone: EBITDA declined 24% QoQ to INR45b, driven by lower volumes (by 6%) and higher conversion charges.
- Bhushan Steel: Sales volume declined 19% QoQ to 920kt due to lower demand from the automotive and appliance segment and the higher base due to destocking in 2Q. EBITDA declined 14% QoQ to INR10.1b.
- TSE's EBITDA per ton declined USD14 QoQ to USD56 due to lower spreads and planned shutdown.
FCF generation still elusive due to high debt
- TATA has highly profitable operations in India, but its capital allocation and the track record of turning around acquired assets have been poor. Both Bhushan Steel and Usha Martin's steel business acquisition has been expensive, which will drag earnings for years. For TATA to generate FCF, S/A needs to generate EBITDA per ton above INR12,000. Thus, the stock is a play on steel prices.
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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