October 31, 2017 ICICI Securities Ltd | Retail Equity Research Result Update Muted performance; set to improve... Tata Steel reported muted Q2FY18 numbers. Tata Steel Europe’s EBITDA/tonne came in lower than our estimates on account of lower realisations while the EBITDA/tonne of Indian operations came in lower on account of higher than expected operating costs The Indian operations reported sales volume of 3.1 million tonnes (MT) while European operations steel sales came in at 2.6 MT. The consolidated operating revenues came in at | 32464.1 crore (up 23.1% YoY, 9.8% QoQ) in line with our estimate of | 32468.6 crore The EBITDA/tonne of domestic operations came in lower at | 10959/tonne (our estimate: | 13500/tonne). European operations reported an EBITDA/tonne of ~US$45/tonne (our estimate: US$85/tonne). The consolidated reported EBITDA came in at | 4720.7 crore. The consolidated EBITDA margin was at 14.5% while ensuing consolidated PAT was at | 1017.8 crore JV with Thyssenkrupp to create No.2 steel player in Europe... Tata Steel and Thyssenkrupp AG have signed a memorandum of understanding (MoU) to combine their respective flat steel businesses in Europe and for the steel mill services of Thyssenkrupp group. The proposed 50:50 joint venture (JV) would be named Thyssenkrupp Tata Steel. The JV would be formed through a non-cash transaction framework, based on fair valuation where both shareholders would contribute debt and liabilities to achieve equal shareholding in the venture. The company intends to sign definitive agreement by March 2018 and is looking to close the deal by December 2018 or March 2019. The new company Thyssenkrupp Tata Steel would have annual shipments of ~21 million tonne with pro forma turnover & EBITDA of €15 billion (| 115000 crore) and ~€1.5 billion, respectively. Tata Steel’s initial assessment indicates the JV to benefit from cost synergies in the range of ~€ 400-600 million realised through integration of commercial functions, R&D and other supporting activities. Focus on enhancing domestic operations to augur well… Tata Steel’s Indian operations continued to register healthy sales volume growth during H1FY18 which increased 23% YoY. The sales volume growth was notably higher compared to the domestic steel consumption growth of 4.3% YoY during the same period reflecting increase in Tata Steel’s market share domestically. Going forward, the anticipated JV (once it goes through) is expected to deleverage the consolidated balance sheet of the entity and provide platform to pursue both organic/inorganic growth in the domestic market which augurs well in the long run. We upward revise domestic sales volume estimate for FY18E to 12.3 MT (from 12 MT earlier), and maintain FY19E volume estimate of 12.5 MT. Long term story intact; maintain BUY… Tata Steel reported a muted Q2FY18 performance. Going forward, we expect the realisations to increase in the backdrop of firming of domestic steel prices. However, on account of subdued performance, we have marginally downward revised EBITDA/tonne estimates for Indian operations to | 11500/tonne (from | 12000/tonne earlier) for FY18E and | 13250/tonne (from | 13500/tonne earlier) for FY19E. European operations EBITDA/tonne estimate has been downward revised to US$65 /tonne (from US$75/tonne earlier) for FY18E, maintained for FY19E at US$75/tonne. We have incorporated synergy benefit of the potential JV in our target price. We have valued the stock on SOTP basis and arrived at a target price of | 785. We maintain BUY rating. Rating matrix Rating : Buy Target : | 785 Target Period : 12 months Potential Upside : 12% What’s Changed? Target Changed from | 700 to | 785 EPS FY18E Changed from | 61 to | 54.9 EPS FY19E Changed from | 71.8 to | 70.3 Rating Unchanged Quarterly Performance Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%) Revenue 32,464 26,371 23.1 29,557 9.8 EBITDA 4,721 2,970 58.9 4,974 (5.1) EBITDA (%) 14.5 11.3 328 bps 16.8 -229 bps Rep. PAT 1,018 (49) LP 921 10.5 Adj. PAT 1,043 (104) LP 1,532 (31.9) Key Financials (| Crore) FY16 FY17 FY18E FY19E Net Sales 117151.6 112299.4 130858.4 134790.1 EBITDA 7585.6 17007.8 19256.6 22202.1 Adj Net Profit -2243.2 4092.1 5324.2 6817.5 EPS (|) -23.1 42.2 54.9 70.3 Valuation summary FY16 FY17 FY18E FY19E PE (x) NA 16.7 12.8 10.0 Target PE (x) NA 18.6 14.3 11.2 EV/EBITDA(x) 19.7 8.7 7.6 6.4 P/BV (x) 2.2 1.8 2.0 1.7 Adj RoNW (%) -7.3 10.8 15.5 17.0 Adj RoCE (%) 2.1 9.4 11.5 12.3 Stock data Particular Amount Market Capitalization (| Crore) 68,402 Total Debt (FY17) (| Crore) 83,014 Cash & Cash Eq. (FY17) (| Crore) 17,458 EV (| Crore) 133,958 52 week H/L (|) 735 / 366 Equity capital | 970.2 Crore Face value | 10 Price performance (%) Return % 1M 3M 6M 12M JSW Steel 6.2 22.3 32.6 59.1 Tata Steel 10.1 30.1 59.9 77.5 Research Analyst Dewang Sanghavi [email protected]Akshay Kadam [email protected]Tata Steel (TATSTE) | 704
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Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Bloomberg, Company, ICICIdirect.com Research
Key events
Date Event
May-17
India Ratings (Ind-Ra) maintains rating watch evolving (RWE) on Tata Steel's credit rating of IND AA/IND A1+. The RWE reflects the uncertainty regarding the
divestments and/or formation of joint ventures (JVs) pertaining to TSL’s European operations. Ind-Ra expects to resolve the rating watch by October 2017, after it
gains greater clarity on the same
Jun-17 Tata Steel sells 8.35 crore shares of Tata Motors to Tata Sons at a price of | 452.8/ share (excluding brokerage and STT) resulting into a cash inflow of | 3783 crore.
Jun-17 Tata Steel completes disinvestment of its entire equity stake in the 50% joint venture Tata Elastron SA to Elastron SA for a consideration of € 0.37 million
Jun-17
Tata Steel completes sale of its 42 inch and 84 inch submerged arc weld (SAW) pipe mills in Hartlepool to Liberty House Group. The two mills are independent of the
company's strip products supply chain in the UK. Tata Steel did not disclose the consideration involved in the deal
Aug-17
Tata Steel has signed an agreement on segregating the company’s UK business from its pension scheme that will potentially free it up to pursue strategic options for
the unit. As part of the arrangement, Tata Steel UK will make a payment of £550 million to the British Steel Pension Scheme (BSPS) while 33% of Tata Steel UK’s
equity will be issued to the scheme’s trustee
Sep-17
Tata Steel UK has received confirmation from The Pensions Regulator regarding approval of Regulated Apportionment Arrangement (RAA) with respect to the British
Steel Pension Scheme (BSPS). As part of RAA, Tata Steel UK has made a payment of £ 550 million and issued shares equivalent to a 33% stake in the company to
the BSPS Trustee under the terms of a shareholder's agreement
Sep-17
Tata Steel and Thyssenkrupp AG have signed an MoU to combine their respective flat steel businesses in Europe and for the steel mill services. The proposed JV
would be named Thyssenkrupp Tata Steel which will have annual shipments of ~21 million tonne (MT) and is likely to have a proforma turnover of ~ €15 billion per
annum (|115000 crore). The JV would be formed through a non cash transaction framework, based on fair valuation where both shareholders would contribute debt
and liabilities to achieve equal shareholding in the venture. The company intends to sign definitive agreement by March 2018 and is looking to close the deal by
December 2018 or March 2019
Oct-17
Tata Steel has acquired Rio Tinto's smelter technology and intellectual property rights required to operate Hisarna process. The technology removes a number of pre-
processing steps, resulting in significant efficiency gains and 20% reduction in energy use and carbon dioxide emissions as well as reducing steelmaking costs
through lower priced raw materials (up to half of which could be recycled scrap steel)
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m)
1 Tata Group of Companies 30-Jun-17 31.1 301.8 0.0
2 Life Insurance Corporation of India 30-Jun-17 11.9 115.3 -6.7
ICICI Securities Ltd | Retail Equity Research Page 15
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