Q1FY24 Review: Tata Steel: India growth capex taking priority

26 Jul 2023 , 02:11 PM

Tata Steel’s Q1 beat was driven by India operations, on the back of healthy NSR. This will reverse in 2Q, but would be fully offset by ~US$50/t fall in coking coal costs. TSE’s US$191mn Ebitda loss should gradually improve through FY24, aided by the restart of TSN BF6 and lower gas/power costs. Key change in stance was priority to India growth capex over deleveraging with FY30 target capacity of 40mt primarily through organic route. Existing iron ore mines and further mine wins should ensure that RM security is maintained. 

Analysts of IIFL Capital Services retain estimates. India business – Q1 a beat; stability ahead: 

Q1 standalone Ebitda at Rs64.6bn (Rs13,981/t, not adjusted for other income, forex) and TSLP Ebitda at Rs1.6bn beat IIFLe led by better realisations, which offset rise on royalty and other costs. Incrementally, Q2 would see ~Rs3,200/t NSR drop that would be offset by ~US$57/t fall in coking coal cost. Gains from 6mtpa pellet plant and gradual ramp-up of 2.2mtpa CRM at TSK will support Ebitda through FY24. Management maintained ~1.5mt incremental volume guidance for India operations. 

TSE targeting breakeven in FY24: 

With US$191mn of Ebitda loss in Q3 and US$579mn over past 3 months, TSE has suffered from weak spreads, elevated gas/electricity costs and volume hit for BF-6 relining at TSN. BF-6 post relining will commence operations in Q3, aiding normalisation of profitability/FCF at TSN. Combined with lower hedged gas/electricity costs gradually over next 3 quarters, this should support FY24 breakeven for TSE. However, possible structural changes at TSUK post finalisation of discussions with the UK govt could have additional costs, which would hurt reported Ebitda. 

India growth taking priority over deleveraging: 

Management highlighted a higher priority to India growth capex with 2030 capacity target of 40mt vs 21mt currently and 5mtpa TSK2 commissioning in FY24 end. Hence, while US$1bn deleveraging target stays, the aim is also to stick to 2-2.5x ND/Ebitda range vs 2.9x currently. TSE capex, as required for viable decarbonised operations, would also be needed. However, inorganic expansion is not planned, given the organic growth optionality across multiple sites in India.