Q2FY23 Review: Tata Steel: India ops on track; TSUK transition in focus

3 Nov 2023 , 01:32 PM

Tata Steel’s India business focus remains on track with in-line Q2, on-track expansion projects and focus on next leg of expansion projects. TSE with loss of US$305m dragged 22 but should see gradual improvement over H2 and FY25 once TSN BF relining is complete in Nov-23 and TSUK upstream operations are wound down amid the transition process. While company has provided Rs36.1bn in Q2 towards restructuring costs, this along with any incremental cash outflow would only be known by end FY24. Management focus is on ensuring a cash neutral downstream operations at TSUK till EAF is commissioned by FY28. Analysts of IIFL Capital Services cut FY24 Ebitda estimate by 17% led by TSE drag. They retain ADD. 

India business on track; next leg of growth capex awaited: 

Q2 standalone (incl. TSPL and TSML) volume at 4.82mt and Ebitda/t of Rs14,006 was largely in line with US$59/t offsetting 3% QoQ drop in NSR. Q3 should see gains from higher NSR (~Rs2,200/t) and only US$11/t increase in coking coal cost (lag effect due to inventory). Post CoD of 6mtpa pellet plant and 2.2mtpa CRM mill, focus is on commissioning the 5mtpa BF at TSK-II in H2 with ramp up over FY25-26. Beyond these, mgmt. is on the drawing board for next phase of expansion – 4mpta at NINL followed by 5mtpa each at TSK and Bhushan (target to reach 40mtpa by FY30) with enhanced focus on downstream products. 

Clarity on TSUK transition and costs in next two quarters: 

Q2 consol P&L includes impairment of Rs27.5bn and restructuring provision of Rs36.1bn towards closing the 3mtpa upstream operations at TSUK. Mgmt expects to finalise the process in H2 (50% of ~8000 employees to be impacted) with cash outflows likely over 2-3 qtrs starting FY25. Focus would be ensure a cash neutral downstream operation based on imported slabs to ensure continuity for customers. Capex for the 3mtpa EAF and upgrade of caster/HSM etc would be over three years starting H2FY25 with company’s share of GBP750m to be funded by India operations. 

TSN profitability to normalise in Q4 post relining: 

TSN had reported Ebitda/t of US$171 in Q2FY23 but has reported loss of over US$100/t in H1 amid ongoing relining of BF (contributing 40% if TSN volume) and utilisation of high cost slab inventory. The BF should restart in Dec-23 which would drive normalisation of profitability and cash flows.