Hold

Results Update Tata Steel Target Price

2nd Nov, 2022 Steel 110

Weak Q2, No Sharp Recovery Visible in the Near-term; Maintain HOLD

CMP as of 1st Nov, 2022
Tata Steel reported a weak set of numbers for Q2FY23. Its consolidated revenue stood in line with
our estimates but EBITDA/PAT missed ours and the street's expectations by 16%/13% respectively. CMP (Rs) 101
Consolidated revenue declined by 1%/6% YoY/QoQ. A higher sequential drop in revenue was due Upside /Downside (%) 9%
to a sharp fall in realisations led by a drop in steel prices across geographies. EBITDA dropped by
62%/58% YoY/QoQ and missed ours and consensus estimates by 16%/13%. The fall in EBITDA High/Low (Rs) 139/83
stood steeper than our expectation with margins contracting to 10.3% in Q2FY23 against our Market cap (Cr) 1,23,583
estimate of 14.2% vs. 24%/28% in Q1FY23/Q2FY22. Drop in realisations in India/Europe, lower
Avg. daily vol. (6m) Shrs. 378,93,023
volumes in Europe coinciding with consumption of high-cost inventory led to margin compression.
PAT declined by 87%/80% YoY/QoQ led by a drop in EBITDA and higher finance cost (up 49%/25% No. of shares (Cr) 1221
YoY/QoQ). Segmental Performance: EBITDA per tonne at Indian operations stood at Rs 8,741/t
down 72%/59% YoY/QoQ primarily on moderation in steel realisations combined with utilisation of Shareholding (%)
high-cost inventory. TSE EBITDA/tonne declined by 39%/66% YoY/QoQ led by lower steel Mar-22 Jun-22 Sep-22
deliveries and realisations along with higher coking coal consumption costs.
Promoter 33.92 33.92 33.92
Jump in net debt: The company’s net debt has jumped by Rs 17,249 Cr in Q2FY23 to Rs 71,753
Cr. Cash payouts of Rs 19,000 Cr in Q2FY23 on account of NINL acquisition (Rs 10,500 Cr), FY22 FIIs 22.87 21.95 21.52
dividend payout (Rs 6,300 Cr), and growth Capex (total Capex in H1FY23 stood at Rs 6,100 Cr) MFs / UTI 10.08 9.21 7.31
cumulatively increased its net debt. FCF stood negative at Rs 1,104 Cr vs. positive at Rs 12,029 Cr
Banks / FIs 0.1 0.07 0.09
in H1FY22.
Others 33.03 34.85 37.16
Key Concall Highlights
Financial & Valuations
 Margins likely to expand (at India level) in H2FY23: Prices are expected to stabilise in
H2FY23 as spot prices have stopped falling post the lean monsoon period and traders have Y/E Mar (Rs Cr) FY 23E FY 24E FY 25E
stopped postponing purchases post severe destocking in Q2FY23. End-user industries Net Sales 2,31,900 2,27,385 2,27,069
such as Autos are picking up and driving demand in H2FY23, which will help consolidate EBITDA 33,087 27,055 33,259
prices in India. However, NSRs will be Rs 800/t lower in Q3FY23 vs. Q2FY23 as the H1
Net Profit 13,534 9,741 13,821
auto contract negotiations were concluded late. On the cost front, Coking coal consumption
cost to drop by $80/t in India which will support margins. EPS (Rs) 11.4 8.3 11.7
 Margin compression likely in Europe but won't be EBITDA negative in H2: In Q3, PER (x) 8.8x 12.1x 8.7x
coking coal consumption cost is expected to drop in Europe by $100/t from Q2 levels. P/BV (x) 1.0x 0.9x 0.9x
Furthermore, iron ore is expected to drop by $15/t in Europe QoQ. Higher gas and Carbon EV/EBITDA (x) 1.6x 1.9x 1.3x
cost are expected to put pressure on margins but the EBITDA will not turn negative in H2 as
ROE (%) 11% 7% 10%
carbon and gas costs have peaked. Moreover, in both Netherlands and the UK, the
company has a 75% hedge against cost increases. On the revenue side, spot prices have
come down but the company has LT contracts till Dec’22 which are higher than spot prices Change in Estimates (%)
which will protect EBITDA fall. Y/E Mar FY23E FY24E FY25E
 WC release ahead in H2: Large part of the high-cost inventory at the end of Q1 was sold in Sales 8% 9% 15%
Q2 and the total inventory released was worth Rs 5,300 Cr in Q2 consisting of both RM and EBITDA -5% -6% 14%
FG (split is not quantified). The company has a negative WC of Rs 1,400 Cr. Further WC
PAT (Attrib) -8% -10% 24%
release will be targeted in H2FY23 from the Indian operations. In Q2FY23, the build-up of
slab stocks at the Netherlands for BF6 which will go for relining in Q1FY24 contributed to
the WC build-up in Q2 which will be diluted as the furnace goes for the shutdown. ESG disclosure Score**
 Deleveraging path to continue: The company’s gross debt increased to Rs 87,516 Cr in Environmental Disclosure 25.70
Q2FY23 from Rs 75,561 Cr in Mar’22. The target is to achieve a flat position in gross debt
Social Disclosure Score 13.48
by end of Mar’23 on a YoY basis. The management stated that the deleveraging target and
Governance Disclosure Score 89.86
path to remain intact will match up the capital allocation with deleveraging.
Total ESG Disclosure Score 43.07
Valuation & Recommendation: Although the Indian operations may see some improvement in
Source: Bloomberg, Scale: 0.1-100
margins in 2HFY23 based on domestic steel demand, we foresee the macro risks to persist for the
steel cycle and don’t expect a sharp recovery in EBITDA per tonne in H2FY23E/FY24E. Margins in **Note: This score measures the amount of ESG data a company reports
publicly and does not measure the company's performance on any data point.
Europe are also expected to remain under pressure in the medium term. In the backdrop of slower All scores are based on 2020 disclosures
growth in China and its construction sector along with inflation-led macro risks in the US/Europe, we
maintain our cautious approach towards steel prices. The stock is currently trading at 4.2x 12MF
EV/EBITDA, below its 10Y average of 6.2x. We value the company using SoTP by assigning a 1- Relative performance
year forward EV/EBITDA based on its geographical segments. We ascribe 6.0x, 5.0x, and 3.5x
multiple to India standalone, other operations (excl standalone), and Europe on Sep’24E EBITDA to 425
arrive at a 1-year forward TP of Rs 110/share (from previous TP of Rs 115). The TP implies an 325
upside potential of 9% from the CMP. We maintain our HOLD rating on the stock. 225
125
25
Key Financials (Consolidated)
Jul-20
Jan-20

Sep-21
Feb-21

Nov-22
Apr-22

(Rs. Cr) FY 22A FY 23E FY 24E FY 25E

Net Sales 2,43,959 2,31,900 2,27,385 2,27,069
EBITDA 63,490 33,087 27,055 33,259
Net Profit 40,154 13,534 9,741 13,821 Tata Steel BSE Sensex
EPS (Rs.) 332.4 11.4 8.3 11.7
PER (x) 0.3x 8.8x 12.1x 8.7x Source: Capitaline, Axis Securities
P/BV (x) 0.1x 1.0x 0.9x 0.9x
EV/EBITDA (x) 1.0x 1.6x 1.9x 1.3x
ROE (%) 41% 11% 7% 10%
Source: company, Axis Research Aditya Welekar
Research Analyst
Email: aditya.welekar@axissecurities.in

1
Results Review

Earnings Changes
New Old % Change
FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Sales 2,31,900 2,27,385 2,27,069 2,15,136 2,09,240 1,98,172 8% 9% 15%
EBIDTA 33,087 27,055 33,259 34,777 28,655 29,107 -5% -6% 14%
PAT (Attrib) 13,534 9,741 13,821 14,633 10,781 11,123 -8% -10% 24%

Tata Steel Q2FY23 Results review

Q2FY22 Q1FY23 Q2FY23 Q2FY23 Q2FY23 YoY(%) QoQ(%) vs. Axis Est vs. Consensus
Actual Actual Axis Est Consensus Actual % % % %
Total Revenue Rs Cr 60,387 63,430 52,714 52,677 59,878 -1% -6% 14% 14%
Total Segment EBITDA Rs Cr 16,618 15,047 7,506 7,186 6,271 -62% -58% -16% -13%
Adj EBITDA per tonne Rs/tonne 24,112 21,661 9,989 8,045 -67% -63% -19% NA
EBITDA margin (%) % 27.5% 23.7% 14.2% 13.6% 10.5%
Reported PAT (Attrib) Rs Cr 11,918 7,765 3,383 3,029 1,514 -87% -80% -55% -50%
Diluted EPS (Rs) Rs/sh 9.92 6.36 2.77 1.62 1.24 -87% -81% -55% -23%
Net Debt Rs Cr 68,860 54,504 71,753 4% 32% NA NA

Source: company, Axis Securities, Bloomberg consensus

Q2FY22 Q1FY23 Q2FY23 YoY(%) QoQ(%)

Segmental EBITDA Actual Actual Actual % %
Tata Steel India Rs Cr 13,557 9,616 5,135 -62% -47%
Tata Steel Long Products Rs Cr 302 (34) (229) -176% NA
Other Indian operations Rs Cr 797 344 100 -87% -71%
Tata Steel Europe Rs Cr 3,340 6,037 1,788 -46% -70%
Other trade-related operations Rs Cr 1,204 (587) (477) -140% NA
SE Asian operations Rs Cr 428 303 109 -75% -64%
Rest of the world Rs Cr 51 (36) (59) -217% NA
Total Rs Cr 19,680 15,643 6,366 -68% -59%
Less: intersegment eliminations Rs Cr 3,062 595 95 -97% -84%
Total segment EBITDA Rs Cr 16,618 15,047 6,271 -62% -58%

Production volume:
Tata Steel India Mnt 4.56 4.73 4.64 2% -2%
Tata Steel Europe Mnt 2.56 2.44 2.40 -6% -2%
Tata Steel Long products Mnt 0.38 0.26 0.22 -42% -15%
Tata Steel Thailand Mnt 0.27 0.31 0.3 11% -3%
Total Consolidated Mnt 7.77 7.74 7.56 -3% -2%
Delivery volumes:
Tata Steel India Mnt 4.42 3.89 4.76 8% 22%
Tata Steel Europe Mnt 2.14 2.14 1.87 -13% -13%
Tata Steel Long products Mnt 0.50 0.28 0.30 -40% 7%
Tata Steel Thailand Mnt 0.33 0.31 0.3 -9% -3%
Total Consolidated Mnt 7.39 6.62 7.23 -2% 9%
Source: company, Axis Securities

2
Key Concall Highlights

 NSR guidance for Q3FY23: Tata steel’s guidance on NSR for Q3FY23 is Rs 800 per tonne lower than Q2FY23, largely because the auto
contracts negotiations were concluded late and the company had some debt and credit rules which helped it in Q2FY23, but otherwise on
a product to product level this quarter shall have witnessed higher NSR but on a weighted average basis its Rs 800 per tonne lower.
 Coking Coal price volatility: In Q3FY23Coking coal consumption cost is expected to drop in India by $80 per tonne and in Europe by
$100 per tonne from Q2FY23. Iron ore cost is expected to drop by $15 per tonne in Europe QoQ. Management stated that Coking coal
prices are to stay in the range of $250-$325 per tonne and will not fall much further as liquidity is low and Australian weather concerns
loom on supply. Recently, the prices have stood volatile with prices going down to $250 per tonne and back to $300 per tonne adding to
cost pressure.
 Impact of high energy costs on cash position in Europe: The management stated that they are less vulnerable in the Netherlands due
to its better energy balance and customers want supply security as many sites in Europe have shut down due to high energy costs. Dutch
business is traditionally cash positive and it will likely remain cash-positive. The UK continues to be a challenge to keep it cash-positive.
 Decarbonisation plan: In the Netherlands, the company has started internally escrowing cash flow to set up a corpus for transitioning to
green steel. In the UK, the transition can not happen without government support. The general demand of the steel industry is to demand
50% of the transition Capex from the respective governments. Tata steel has already put a request to both UK and Netherlands
governments.
 Growth optionality: Its immediate focus is on the Kalinganagar expansion from 3 to 8mtpa. Neelachal expansion from 1 to 5 mtpa. This
will be followed by Bhushan steel expansion (from 5 mtpa to 10 mtpa), and back again to Kalinganagar from 8mtpa to 13mtpa (as Kalinga
would have already established contractors in place). Management said it has enough landbank to meet its growth ambitions through
organic growth through existing sites. The organic growth option allows them to pace the growth Capex as per the steel cycle.
 TSK/Neelachal expansion: The Kalinganagar expansion to 5mtpa is progressing well and will be completed by the end of FY24, the
volume impact will be felt in FY25. CRM and pellet plant at TSK started this quarter. The Neelachal plan will be ramped up to its rated
1mtpa capacity by the end of FY23 and the volume impact will be visible from FY24 onwards.
 Chinese exports are trending down after hitting a peak of 7.7 MT in May’22, now they are at ~5 MT which is a manageable volume for
the World steel industry. Chinese steel companies are not making money at the spot prices and have a low appetite to reduce prices.
Also, as per WSA Chinese production is in tandem with consumption and hence management does not foresee much threat from
Chinese exports. Japan and Korea on the other hand are big exporters to India and Japan is exporting more as they are getting benefits
from a weaker Yen. Korea has supply issues but it is traditionally a big exporter.
 Tata Steel's long products performance: Royalty payments and higher finance costs of the NINL acquisition are leading to losses at
the standalone TSLP level. However, these are more structural issues and not operational losses. The consolidation of TSLP with the
parent company removes the losses on a consolidated basis.

3
Exhibit 1: Sharp drop in Consolidated EBITDA per tonne Exhibit 2: HRC Prices India and Europe ($/tonne) downward trend

30,000 1,950
N Europe S Europe India Vietnam
25,000 1,650

20,000 1,350

15,000 1,050

10,000 750
5,000
450
-
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Source: Bloomberg, Axis Securities

Exhibit 3: Tata Steel Expansion plan

Source: company presentation

4
Financials (Consolidated)
Profit & Loss (Rs Cr)
Y/E March FY 22A FY 23E FY 24E FY 25E

Total Operating income 2,43,959 2,31,900 2,27,385 2,27,069

Total Expenditure 1,80,469 1,98,813 2,00,329 1,93,810

EBITDA 63,490 33,087 27,055 33,259
Depreciation and Amortization 9,101 9,367 9,972 10,597
EBIT 54,389 23,720 17,084 22,662

Other Income 785 824 865 909

Share Of P/L Of Associates (Net of Tax) 649 682 716 751
Less: Interest & Fin Chg. 5,462 4,404 3,679 3,058
Less: Exceptional Items 134 - - -
Profit before tax 50,227 20,822 14,986 21,264
Provision for Tax 8,478 7,288 5,245 7,442
Reported PAT 41,749 13,534 9,741 13,821
Minority Interest 1,595 - - -
Attributable PAT 40,154 13,534 9,741 13,821

EPS (Rs/sh) Basic 332.4 11.4 8.3 11.7

DPS (Rs/sh) 51.0 2.5 2.5 2.5
Source: company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY 22A FY 23E FY 24E FY 25E
Net Block 1,16,166 1,19,550 1,22,328 1,25,331
Other Tangible assets 8,338 8,338 8,338 8,338
CWIP + ITUD + Other Intangible Assets 26,518 28,768 31,018 33,418
Goodwill 4,311 4,527 4,753 4,991
Investments 13,140 13,649 14,183 14,744
Inventories 48,824 46,411 45,507 45,444
Trade Receivables 12,246 11,641 11,414 11,399
Cash / Bank balance 15,605 10,715 3,931 485
Retirement Benefit Assets 20,399 20,807 21,223 21,648
Misc. Assets 19,898 20,667 21,472 22,316
Total assets 2,85,446 2,85,072 2,84,168 2,88,113

Equity capital 1,221 1,221 1,221 1,221

Hybrid Perpetual Securities/ Share warrants - - - -
Reserves 1,13,222 1,23,703 1,30,391 1,41,159
Minority Interests 2,655 2,655 2,655 2,655
Total Borrowings 68,829 57,829 48,829 39,829
Def Tax Liabilities 12,326 12,326 12,326 12,326
Retirement Benefit Obligations 3,572 3,751 3,938 4,135
Provisions 7,594 7,974 8,373 8,792
Trade Payables 36,765 34,948 34,267 34,219
Other Liabilities and Provision 39,261 40,666 42,168 43,777
Capital employed 2,85,446 2,85,072 2,84,168 2,88,113
Source: company, Axis Securities

5
Cash Flow (Rs Cr)
Y/E March FY 22A FY 23E FY 24E FY 25E
Profit before tax 50,227 20,822 14,986 21,264
Depreciation 9,101 9,367 9,972 10,597
Interest Expenses 5,462 4,404 3,679 3,058
Non-operating / EO item 1,110 (600) (618) (636)
Change in W/C (9,618) 2,409 1,747 1,427
Income Tax (11,902) (7,288) (5,245) (7,442)
Operating Cash Flow 44,381 29,114 24,521 28,267
Capital Expenditure (10,522) (15,000) (15,000) (16,000)
Free cash Flow 33,859 14,114 9,521 12,267
Other Investments (359) (724) (761) (799)
Investing Cash Flow (10,881) (15,724) (15,761) (16,799)
Proceeds from the issue of Equity shares 326 - - -
Proceeds / (Repayment) of Borrowings (15,231) (11,000) (9,000) (9,000)
Finance cost paid (4,687) (4,404) (3,679) (3,058)
Dividend paid (3,020) (3,053) (3,053) (3,053)
Other Financing activities (789) 179 188 197
Financing Cash Flow (23,401) (18,279) (15,544) (14,914)
Change in Cash 10,099 (4,889) (6,784) (3,446)
Opening Cash 5,532 15,605 10,715 3,931
Closing Cash 15,607 10,715 3,931 485
Source: company, Axis Securities

Ratio Analysis (x) / (%)

Y/E March FY 22A FY 23E FY 24E FY 25E
Operational Ratios
Sales growth (% YoY) 56% -5% -2% 0%
EBITDA growth (% YoY) 108% -48% -18% 23%
Op. profit growth (% YoY) 156% -56% -28% 33%
Net Profit growth (% YoY) 436% -66% -28% 42%
EBITDA Margin % 26% 14% 12% 15%
Net profit Margin % 16% 6% 4% 6%
EBITDA/t (Rs/tonne) 0% 0% 0% 0%
Tax Rate % 17% 35% 35% 35%
Efficiency Ratios
Total Asset Turnover (x) 0.92 0.81 0.80 0.79
Sales/Gross block (x) 1.27 1.18 1.08 1.02
Sales/Net block(x) 2.07 1.97 1.88 1.83
Working capital/Sales (x) 0.10 0.10 0.10 0.10
Valuation Ratios
PER (x) 0.3x 8.8x 12.1x 8.7x
P/BV (x) 0.1x 1.0x 0.9x 0.9x
EV/Ebitda (x) 1.0x 1.6x 1.9x 1.3x
EV/Sales (x) 0.2x 0.2x 0.2x 0.2x
Dividend Yield (%) 50.4% 24.7% 24.7% 24.7%
Return Ratios
ROE 0.41 0.11 0.07 0.10
ROCE 0.29 0.12 0.09 0.11
ROIC 0.28 0.09 0.07 0.09
Leverage Ratios
Debt / equity (x) 0.61 0.46 0.37 0.28
Net debt/ Equity (x) 0.47 0.31 0.27 0.21
Net debt/Ebitda (x) 0.71 1.14 1.30 0.88
Interest Coverage ratio (x) 11.62 7.51 7.35 10.88
Source: company, Axis Securities

6
 Tata Steel Price Chart and Recommendation History

(Rs)

Date Reco TP Research

05-Apr-22 BUY 170 Initiating Coverage
04-May-22 BUY 170 Result Update
25-May-22 BUY 139 Sector Update
26-Jul-22 HOLD 104 Result Update
19-Sep-22 HOLD 115 Sector Update
02-Nov-22 HOLD 110 Result Update
Source: Axis Securities

7
About the analyst

Analyst: Aditya Welekar

Email: aditya.welekar@axissecurities.in

Sector: Metals & Mining

Analyst Bio: Aditya Welekar is PGDBM in Finance with 10 years of experience in Equity Market/Research.

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8
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

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NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

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