Q3FY23 Review: Tata Steel: Weak Q3; drag from TSE to continue

8 Feb 2023 , 10:34 AM

Q3 consolidated Ebitda at Rs27.3bn missed estimates by 25%. Standalone adj. Ebitda of Rs47.6bn (Rs10,377/t) was hurt also by higher Other expenses. TSE reported Ebitda loss of US$189mn (-US$95/t) led by weak NSR and additional impact from GBP55mn (US$34/t) of NRV loss on accumulated slab inventory for BF relining in Q4. Associated costs for NINL ramp-up also hurt consolidated Ebitda.

Following Rs27.3bn consolidated Ebitda (25% below IIFLe), mgmt commentary on Europe operations remains bleak, with TSUK nearing end of life even as mgmt evaluates the announced proposals for support in UK. Outlook for India operations is brighter, as steel prices rise (on China reopening) and the company gains from lower pellet costs, higher value addition and NINL ramp-up. 

India business profitability should improve in Q4 and FY24, given brighter outlook for steel prices (spot domestic HRC is up 12% vs Q3 avg) as economic activity in China picks up gradually. While rising coal and iron ore costs will support steel prices, coal costs will also hurt profitability starting Q1FY24. In FY24, Tata Steel would benefit from: (i) Captive pellet production, given that 6mtpa expansion is now ramping up. (ii) Higher value addition post commissioning of CRM complex at TSK by mid FY24. (iii) Ramping up of volumes at NINL to 1mt in FY24.

Analysts of IIFL Capital Services cut Ebitda estimates by 19% for FY23, 5% for FY24. They maintain Add with Target Price of Rs127/share.