MOSL: TATA STEEL (Upgrade to Neutral)-Strong sales volumes dilute steel price headwinds
TATA STEEL: Strong sales volumes dilute steel price headwinds; Strong FCF generation after a long time; upgrading to Neutral
(TATA IN, Mkt Cap USD8.3b, CMP INR511, TP INR533, 4% Upside, Upgrade to Neutral)
Tata Steel's (TATA) 4QFY19 consol. EBITDA increased 12% QoQ (+16% YoY) to INR75.1b (our estimate: INR68b), driven by heavy destocking across the group and higher margins in Europe, partially offset by margins compression in India. SEA (South East Asia) is now reported as held for sale. Adj. PAT of INR24.2b (+7% QoQ) was in line with our estimate.
- Standalone: EBITDA increased 9% QoQ to INR49.5b as sales grew by 21% QoQ to 3.6mt owing to destocking, partially offset by a 10% QoQ decline in EBITDA per ton to INR13,766/t as steel prices declined by INR3,500/t QoQ.
- Bhushan: EBITDA declined 22% QoQ to INR7.9b, led by a 37% fall in EBITDA per ton to INR6,895/t due to steel price decline, partially offset by strong sales growth of 24% QoQ to 1.14mt aided by destocking.
- TSEs: EBITDA increased 79% QoQ to INR17b, led by 9% growth in sales tonnage, a reduction in operating cost on the restart of BF5 at Port Talbot and INR5b worth one-offs (sale of land and carbon credits).
FCF generation after a long time; raising EBITDA by 4%; upgrading to Neutral
- FY19 consol. EBITDA increased 34% to INR294b and PAT rose 27% to INR101b, led by higher steel prices. Net debt increase of only INR258b against INR352b paid for Bhushan Steel acquisition implies that FCF generation was strong at ~INR100b during the year, led by working capital release.
- In FY20, we are de-consolidating Europe & SEA and consolidating acquired steel assets of Usha Martin. Consol. EBITDA is expected to decline 22% on the impact of M&A, asset sale and lower steel prices. We are raising our EBITDA estimate by 4% to INR230b on a lower-than-expected decline in steel prices.
- As a combined impact of EBITDA upgrades and lower-than-expected debt, we are raising the SOTP to INR533/share (earlier: INR367) based on FY20 and upgrading the stock to 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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