Tata Steel - Export advances helped Q3FY21 deleveraging - ICICI Securities

Key takeaways from Tata Steel Q3FY21 conference call were i) ~ Rs60bn+ export advances (forward sell of export volumes) helping equivalent net debt reduction in Q3FY21, ii) ~ £110mn of one off expenses in Tata Steel Europe in Q3FY21 with majority being reversal of wage support provisions in Q1/Q2FY21, iii) Q4FY21 will witness realisation increase of Rs6,000-7,000/te QoQ in domestic operations, will see a gross debt reduction of Rs 120bn and the proceeds from call of partly paid shares have not been factored in the same, iv) Net debt to EBITDA upper bound of 2.75x reiterated; management highlighted the priority of US$1bn of capex over other capital allocation each year and v) Tata Steel long products (TSLP) business appears prospective with ~5mtpa capacity possible where management is trying out various options around scrap recycling to limit capital intensity. We maintain REDUCE.

- Management continues to highlight net debt reduction target of US$1bn p.a. FY22E capex will be significantly higher than FY21E. Q4FY21 capex will be ~ Rs 20bn. With restart of pellet and CRM plant in Kalinganagar, one can look at meaningful YoY capex increase. Also KPO phase 2 will require some enabling work which will be carried out in FY22E. KPO phase 2 capex is expected to rampup meaningfully in FY23/24E. Capital allocation priority was well laid out in the call with US$1bn deleveraging taking precedence over capital expenditure each year.

- Bhushan steel merger to be placed before NCLT soon, effective date of merger being April 1, 2019. With combined tax losses of Rs 150bn at Bhushan steel, the post-merger tax benefits amount to ~ Rs 40bn. The same would lead to a writeback of tax provisions. Cash outgo of taxes is already factoring in merger - thereby helping in deleveraging.

- Management continues to look for structural solutions involving Europe. FCF for European operations stood at (Rs 9bn) for Q3FY21. For 9MFY21 the same stood at +Rs7bn - presumably benefiting from carbon credit sales at the beginning of the year. Management highlighted that i) adjusted for one off provisions on account of carbon credits (£57mn for 9MFY21) and reversal of wage support provisions in Europe (~€94mn in Q3FY21), Europe would have registered positive EBITDA in Q3FY21, ii) Spreads would see significant improvement in Q4FY21, and there will not be any meaningful requirement to purchase carbon credits for Q1FY22 and iii) discussions have started with the UK and European governments for support as transition process towards low carbon commitment takes shape - €300mn investments announced in Ijmuiden is more to address long term issues including demands from communities.

- TSLP holds promise. The merger of TSLP with Tata Metaliks helps create Rs40bn networth entity with current net debt at Rs20bn and with an accelerated deleveraging witnessed. The company can soon create 4-5mnte of long product/DI pipe capacity. More interestingly, the scrap recycling operations started in Rohtak, with partners investing into recycling facilities for Tata Steel, allow an asset light model for expansion in TSLP. This largely allays our fear of possible leveraging up of TSPL facility to create capacity.

Shares of TATA STEEL LTD. was last trading in BSE at Rs.680.45 as compared to the previous close of Rs. 694.5. The total number of shares traded during the day was 458855 in over 7072 trades.

The stock hit an intraday high of Rs. 697.85 and intraday low of 678.3. The net turnover during the day was Rs. 315225997.

Source : Equity Bulls

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