PL Stock Report: Tata Steel (TATA IN) - Q2FY24 Result Update – TSE drags performance but silver lining ahead - BUY

Tata Steel (TATA IN) - Tushar Chaudhari - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs118 | TP: Rs138

Q2FY24 Result Update – TSE drags performance but silver lining ahead

Quick Pointers:

• Relining of blast furnace at Tata Steel Netherlands (TSN) to be completed by November and volumes to improve in 4Q driving TSN EBITDA positive.
• Cash outflow for 3mtpa EAF plant at Port Talbot to begin in 2HFY25 post successful completion of consultation process with unions.

We cut our FY24E/25E/26E EBITDA estimates by 2%/6%/4% on higher coking coal prices and higher losses from TSUK in 1HFY24. Tata Steel’s (TATA) consolidated operating performance was affected by weak Tata Steel Europe (TSE) in 2Q. Tata Steel India (TSI) performance was in-line with EBITDA/t of Rs14,006 while TSE EBITDA loss widened QoQ to USD169/t due to weak demand and lower production from Tata Steel Netherlands (TSN). In 3Q, TSI is expected to deliver stronger EBITDA/t as expected coking coal price hike is just USD10/t for TSI; while weak TSE performance is likely to be negated by lower coking coal prices due to inventory lag effect at TSN (~USD60/t).

Key parameters to watch are a) progress on consultation process with unions at Tata Steel UK (TSUK) which is ongoing and b) commissioning of Kalinganagar blast furnace (KPO II) & stabilization which will drive volume growth in FY25/26E. We expect Revenue/EBITDA/PAT CAGR of 5%/9%/28% over FY23-26E. At CMP, stock is trading at 5.3x/4.8x EV of FY25E/FY26E EBITDA. Retain ‘BUY’ rating with revised TP of Rs138 (earlier Rs144) valuing at 6x EV of Sept 2025E TSI EBITDA, as we roll forward.

• Std. revenue declined 4% QoQ: Std. revenue stood at Rs332.2bn (-4% QoQ/ YoY; PLe Rs312bn) as realization declined 4.6% QoQ to Rs68,928/t (PLe Rs64,683/t). Sales volume was up 1% QoQ at 4.8mt. Consolidated revenue declined 6% QoQ to Rs 556.8bn (PLe 598.7bn).
• In-line TSI EBITDA, weak TSE: Std. EBITDA grew 45%/2% on YoY/QoQ basis to Rs 67.5bn (PLe Rs 68.2bn) led by lower coking coal prices of prior period inventory. EBITDA/t stood at Rs 14,006 (PLe Rs 14,159). Consolidated EBITDA stood at Rs 42.7bn (-30% YoY/-18% QoQ). TSE EBITDA loss widened to USD169/t from USD 96/t in 1QFY24 as sales volume declined 9% QoQ to 1.81mt due to subdued demand while realization improved 4% QoQ to USD 1,359/t. TSE reported EBITDA loss of GBP 242mn vs loss of GBP 152mn in Q1FY24.
  
• Impairment charges for TSUK: Reported Cons. loss of Rs 62bn includes exceptional items of Rs 69bn on account of a) impairment charge of Rs 26.3bn for heavy end assets at TSUK which are expected to be used only for defined period, b) provision of Rs 24.3bn towards restructuring costs (potential asset closure & redundancy cost).
  
• Concall highlights: (1) TSN Blast furnace VI (40% of TSN volumes) relining to be completed in 3QFY4 and volumes to improve in 4Q. (2) Consultation process at TSUK has started and may take another 2-3 months. Heavy end assets at TSUK to be mothballed post end 3QFY24. (3) Restructuring costs expected to be paid in 1HFY25. (4) Work on EAF at Port Talbot to start in 2HFY25. (5) TSE volumes in FY24E/FY25E is expected to be ~8.5mt/9.5mt respectively. (6) TSN operations are expected to be EBITDA positive in 4QFY24. (7) Expansion projects at TSI are on track and KPO II blast furnace is expected to be commissioned in 1QFY25. (8) 0.75mtpa EAF at Ludhiana is expected to come up in FY26. (9) Coking coal costs to increase by USD 10/t QoQ in 3QFY24. (10) FY24 deleveraging target is challenging given current global macro environment, net debt to remain at similar levels for next two quarters (11) Rs 45.5bn spent on capex in 2QFY24 taking 1H capex to Rs 86.4bn.