Tata Steel Rating: buy- Ebitda in Q3FY21 beat estimates

TATA’s Q3 EBITDA rose 53% q-o-q (up 2.1x y-o-y) and was 8% above JEFe. Standalone and BSL Ebitda/t rose a sharp Rs 5-7K q-o-q on higher steel prices, although TSE margins remained under pressure. Balance sheet continues to deleverage with net debt down 11% q-o-q, albeit partly due to export-related advances. While HRC steel prices have come off from Jan peak, spot is still ~20% above Q3 and the full benefit should flow in H1CY21. We retain Buy with TP of Rs 900.

EBITDA beat and deleveraging: TSE margins fell q-o-q to -$47/t, pulled down by one-off carbon provisions and reversal of government wage support. Recurring net profit at Rs 38 bn rose 1.5x q-o-q. TATA generated strong free cash flow of Rs 121 bn and net debt fell by Rs 103 bn (Rs 90/sh) q-o-q, albeit boosted by ~Rs 60 bn of advances on exports.

Gradual start of capex: With the strong turnaround in financial performance, TATA is gradually restarting capex with pellet plant and cold-rolling mill of the KPO Phase-2 project (total cost ~Rs 60 bn). TATA is yet to decide on restarting 5mtpa brownfield expansion.

India margin outlook strong: Indian HRC (flat) steel prices, despite some recent correction, are 20% above Q3 average. Long prices have seen a sharper correction though on easing demand-supply balance. TATA’s India realisations should improve further in Q4 (TATA expects +Rs 6-7K/t) as the full benefit of higher spot and contract prices flows through. Our estimates assume a meaningful moderation in HRC prices to Rs 48-49K in FY22/FY23, 13-14% below spot. Access to captive iron ore is a positive amid elevated ore prices, although global coking coal prices have risen of late. We expect Tata’s standalone Ebitda/t of Rs 23K/18K/Rs 17K in Q4FY21/FY22/FY23.

Europe business H1FY21 outlook better but concerns remain: JEF’s European steel analyst believes that the macro environment and market balance are supportive for the steel industry in the region in H1CY21. N. European HRC prices have continued to rally in the last few months and near-term steel S/D appears tight as mill lead times are well into Q2. However, imports are turning attractive and could soften prices in H2CY21. TSE margins should improve in coming quarters but the medium-term challenges remain, especially with tightening carbon regulations.

Retain Buy: We upgrade FY22 Ebitda by 9% and EPS by 18% on higher steel prices, but broadly retain our FY23 estimates. After 41% y-o-y Ebitda decline in FY20, we see 30-47% growth in FY21-22. We expect deleveraging to continue in FY22-23 although at a slower pace than 9MFY21. Stock has almost doubled since end-Sep, outperforming Nifty by ~60%; however, its 1.0x FY22e PB is still in line with the long-term average. We retain Buy rating with a Rs 900 TP based on 6.0x and 4.0x FY22 EV/Ebitda for India and TSE, respectively.