Tata Steel Rating: Hold-Deleveraging key highlight of results

Standalone Ebitda print surprised at Rs 27,828/te against Rs 26,500/te expected, while Tata Steel Europe (TSE) reported an in-line $66/te of Ebitda.

Deleveraging (Rs 110 bn in Q4FY21) aided by Rs 32.4 bn of net proceeds from partly paid shares was the key highlight of Tata Steel Q4FY21 results. FY21e witnessed ~ Rs 200-bn net debt reduction. Adjusted consolidated Ebitda of Rs 139.3 bn was largely in line, with ~ Rs 3 bn from Tata Steel South East Asia which has been reclassified to “Continuing operations” from “Held for sale”. Standalone Ebitda print surprised at Rs 27,828/te against Rs 26,500/te expected, while Tata Steel Europe (TSE) reported an in-line $66/te of Ebitda.

Mgmt has maintained its net debt reduction guidance of $1 bn + for FY22e. This appears a bit conservative given the MTM earnings and despite accelerated capex. The extent of deleveraging is creating an upward bias for multiples for the entire sector, given significantly reduced loss probability. We maintain Hold with a revised target of ~Rs 1,020/ share at 0.9x FY23E P/B – with significantly reduced loss probability, the increase in valuation band is only a matter of time in our view.

Maintain HOLD: Spot Ebitda at Rs 38,000/te remains a key concern, especially when cycle duration has shrunk. Net pre export advances was largely flat q-o-q at Rs 62.3 bn. While capex is expected to pick up, we expect a possible deleveraging of ~ RS 300 bn+ in FY22e – FY22e can be the defining year where ND/Ebitda approaches 1x before normalising to 2-2.5x. With near zero loss probability through cycle now, one can make an argument for expanding multiples.

Indian operations reported a better than expected print: Tata Steel India standalone adjusted Ebitda came in at Rs 92 bn (+37% q-o-q, +151% y-o-y), ahead of I-Sec estimate of ~Rs 87 bn. Ebitda increased by ~ Rs 7,800/te q-o-q to reach ~Rs 28,000/te. Q4FY21 delivery volume increased 16% y-o-y as domestic deliveries increased 22%y-o-y; exports were at 11% of overall deliveries. Auto volumes increased 13% q-o-q. This, helped realisations. Higher exports and lower auto volumes will define Q1FY22e, yet an Ebitda print of ~ Rs 37-38,000/te is possible. Combined India Ebitda reached Rs 26,309/te against Rs 18.931/te q-o-q.

Key takeaways for TSLP: Steel production grew on the back of debottlenecking at steel melting shop and arcing – improving 7% q-o-q and 19% y-o-y in Q4FY21 while FY21 production increased 11%y-o-y. TSLP increased alloy Wire Rod mix to 49% in FY21 vs. 37% y-o-y, and increased market share to 20% in FY21 vis-a-vis.12% y-o-y, supported by increased share in 2Ws segment. In the auto segment, domestic market share grew to 15% in FY21 vs. 12% y-o-y.

Europe Ebitda in-line; structural solutions awaited: Ebitda came in line at Rs 11.9 bn vs negative Rs 7.2 bn in Q3FY21 (Ebitda/te of $66). Realisations increased only $53/te q-o-q highlighting the spread expansion possibilities in Q1FY22e (despite the increase in iron ore prices).