Tata Steel - Remains in a tight spot, maintain sell - Centrum

Tata Steel reported consolidated PAT loss of ~Rs7.6bn as performance across operations worsened on account of severe realisations drop amidst demand crunch. Consolidated EBITDA dropped ~3% QoQ and stood at Rs22.4bn (margin of 7%) as domestic operations witnessed a sharp fall of ~6% QoQ in realisations and continued to see higher operational costs resulting in standalone EBITDA margin of 27.3%, the lowest in the past 15 qtrs. European operations were worse with negative EBITDA of US$26/tonne. We expect the sequential fall in realizations to reverse marginally in Q4 and expect overall profitability to improve going forward but at a slow pace. We revise our estimates lower for FY13E/14E. We continue to maintain our bearish view with negative stance on European operations, lower margin profile in domestic operations on reduced backward integration post expansion and high interest costs on account of the large debt pile. We maintain Sell with a revised lower target price of Rs355.

Standalone results worsen further due to sharp realization fall: Domestic sales volume stood at ~1.89MT but realizations dropped by 5.9% QoQ on account of pressure on domestic demand, high imports and competition. Costs remained high on power, fuel and freight which led to lowest EBITDA/tonne of ~Rs13300 in the standalone business since Q2FY10.

Margin pressure across operations: Cons. EBITDA stood at ~Rs22.4bn (down by ~3.1% QoQ) with a margin of 7% (well below our expectation of 8.5%). Margin pressure was across operations with domestic operations having a margin of 27.3% (EBITDA/tonne of ~US$247); European operations reported negative EBITDA/tonne of ~US$26. This was mainly due to the sharp fall in realizations and high fixed costs. We see realizations in Europe and domestic markets improving marginally from Q4 onwards. South-East Asian operations had a margin of 4.2% (EBITDA/tonne of ~US$32/tonne).

Conference call highlights and outlook: Guidance of 7.5 MT volumes in FY13E from domestic operations was maintained. Realizations are expected to improve marginally going forward and costs should be lower due to stabilization of new furnace and coke oven batteries. Volumes in Europe will remain under pressure due to low demand but management expects to benefit from the recent commissioning of the repaired BF at Port Talbot. European operations should improve on better volumes and realizations but cost of production could increase due to new carbon legislation. Outstanding net debt increased to ~Rs580bn due to incremental debt funding for capex programs. Group capex guidance is maintained at ~US$2.4bn and interest and depreciation costs will remain higher on account of capitalization of projects. No incremental guidance and details were provided on the international raw material projects.

Earnings revised lower: We maintain our volume and EBITDA estimates of 14MT and US$30/tonne for European operations in FY14E as we see benefit of lower coking coal costs ahead. We reduce our standalone volume estimates marginally but lower our EBITDA estimates by ~11% for FY14E as captive integration on the coking coal front will drop post expansion and product mix will get skewed towards flats, keeping overall realizations lower than before in a subdued and competitive domestic market. We revise our consolidated EBITDA estimates lower by 13.5%/8.5% for FY13E/14E.

Maintain Sell: We value the company on SOTP basis with domestic operations at 6x FY14E EV/EBITDA and Corus & South-east Asian subsidiaries at 4.5x FY14E EV/EBITDA to arrive at a target price of Rs355. Maintain Sell.

Source : Equity Bulls

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