Tata Steel Rating ‘Hold’; Ebitda met estimate in the third quarter

TATA’s Q3 EBITDA rose 68% yoy but was down 3% qoq and in line with JEFe. Ebitda/t fell 6% qoq at standalone and 14% qoq at TSE. TATA expects India margins to contract further in Q4 on lower realisations and higher coking coal costs, although TSE margins should be better. We fine-tune FY22-24 Ebitda but upgrade EPS by 9-16%. After strong FY21-22E, we see Ebitda/EPS falling 35%/48% yoy in FY23. We retain Hold with Rs 1,240 PT.

In-line Q3 Ebitda: Standalone volumes fell 4% qoq while Ebitda/t declined 6% qoq to Rs 29K led by higher coking coal costs. TSE (Europe) volumes were flattish qoq but Ebitda/t was down 14% qoq to $182. Net profit was 2.6x yoy (down 14% qoq) and came 21% above JEFe, despite in-line Ebitda, mainly driven by lower-than-expected tax rate. Net debt fell 9% qoq ie Rs 49/sh.

Caution for steel: After a year-long rally, Asian steel prices softened in Q4CY21 on weak macro and demand concerns in China. China PMI is bottoming out and policy could ease, but there is still risk of muted Chinese growth given the significance of property sector to metal demand. Chinese steel production, conversely, has started to rise and could increase further post the Winter Olympics in Feb.

Margins peaked out: Softer steel and rising coking coal prices have resulted in a sharp normalization in Asian and European steel spot spreads from ~2x of long-term average in H1FY22 to close to the historical average now. TATA expects further compression in standalone margin in Q4. TSE’s Q4 margin outlook, conversely, is better as it benefits from higher-priced autos & packaging contracts. We factor in standalone Ebitda/t of Rs 25K/20K in Q4FY22/FY23 (Q3 Rs 29K). Our FY23 estimates factor in Indian steel price of Rs 58K ($111 below spot) and coking coal price of $230 ($215 below spot). For TSE, we factor in Ebitda/t of $200/$75 in Q4FY22/FY23 (Q3 $182).

NINL Acquisition: Tata Steel Long Products (75% subsidiary of Tata Steel) has acquired 94% stake in Neelanchal Ispat (NINL). Prima-facie the transaction EV of `121 bn appears expensive for NINL’s 1mtpa capacity; however, NINL comes with: (i) large land parcel which can support 10mtpa capacity, and (ii) iron ore reserves of ~100mt.

Retain Hold: We change FY22-24e Ebitda by -2% to +4%, but upgrade EPS by 9-16% on revisions to below-Ebitda-line items. After strong FY21-22e, we see Ebitda/EPS falling 35%/48% yoy in FY23. Cash flows should remain strong though as margins sustain above historical average. TATA’s 1.2x FY23E PB for 18% FY23e ROE is undemanding, but the stock is unlikely to perform until China’s steel outlook and TATA’s earnings visibility improves. An unfavourable outcome of emission-related probe in the Netherlands could pose downside risk.