Tata Steel Q1FY22 Results: Manages to beat estimates

Consolidated Revenue: Rs 53372 ( up 6% QoQ/ up 109% YoY)

Consolidated Profit: Rs 9,768 cr  (up 36.4% QoQ/ up from a loss of Rs 4648 cr in Q1FY21)

Consolidated EBITDA: Rs 16,185 cr (up 13.3%QoQ/ up 25.7x YoY)

Highlights:

• India business posted EBITDA margins above expectations caused by revaluation of a loan and lower conversion charges due to lower activities in Ferro Alloys and Minerals Division.
• Despite higher coal costs, raw material costs were similar as last quarter.
• Europe business however reported a big deviation from the expectations in EBITDA. Europe EBITDA stood at $89/te against the expectation of US$190/te. This was caused by higher raw material costs of iron ore and coal, adverse effect of forex rate changes and higher repairs and rent costs.
• Tata steel capex for the quarter stood at Rs 2,011 cr. This includes work on the pellet plant, the Cold Roll Mill complex and the 5 MTPA expansion at Kalinganagar
• Working capital increased by Rs.8,272. This didn’t allow much deleveraging in this quarter.
• Tata steel’s paid debt of Rs 5,894 cr at the end of the quarter. Net debt of the company stood at Rs 73,973 crore.

Tata Steel Outlook

Tata Steel posted a decent set of numbers which beat street estimates. Although India business were adversely impacted again in this quarter due to the second wave of coronavirus which impacted their steel production as well as deliveries, they achieved highest ever quarterly EBITDA and achieved highest ever PAT. Management says that they are focussed on reducing net debt significantly by the end of this financial year and meeting capex needs. Chinese production cuts may allow some support to the steel prices, but may not stop them from falling. With steel prices expected to fall down and this quarter’s miss in deleveraging, investors should closely follow the story of Tata Steel.

Brokerages on Tata Steel:

JPMorgan: The brokerage has maintained an 'overweight' call on the stock with a target of Rs 1,810. The company reported its highest ever quarterly EBITDA and PAT despite volume being hit by the second wave of the pandemic, according to JPMorgan. Tata Steel's debt declined further on a QoQ basis even after a substantial working capital build, it added.

CLSA: The brokerage has maintained a 'buy' call on Tata Steel with a target price of Rs 1,750. The company's standalone profitability continues to surprise on the upside, according to CLSA. The impact on the company's free cash flow due to the increase in working capital could be transient, it added.