Q3FY24 Review: Tata Steel: India on track; TSUK drag to fall gradually

29 Jan 2024 , 01:05 PM

Tata Steel’s India business stays on track with healthy Q3 Ebitda/t of Rs16,905 and commissioning and ramp up of 5mtpa expansion project over FY25-26. Delay in TSN BF relining hurt Q3 (Ebitda loss of US$112/t), but restart in early Feb’24 should aid volume and profitability. At TSUK, provisions taken in Q2 should suffice largely with cash outflow expected over 18 months, as heavy assets are shut down impacting 2,800 employees. Mgmt focus would be on ensuring a cash neutral downstream operations till EAF is commissioned by FY28. Analysts of IIFL Capital Services cut FY24 Ebitda estimate by 17%, led by TSE drag. Retain FY25-26 estimates. ADD 

India business on track: 

Q3 standalone (incl. TSPL, TSML, TML, TCIL & S&T mining) volume at 4.88mt and Ebitda/t of Rs16,905 was ahead of IIFLe, even as the net NSR increase at Rs90/t QoQ was lower than expected. Only the US$4/t increase in coking coal cost (better blend), Rs800/t QoQ benefit on purchase of semi-finished goods and build-up of FG inventory — drove the surprise at Ebitda. Q4 should see Rs1,000/t fall in NSR, ~US$11/t rise in coal costs and ~0.4mt higher deliveries. TSK-2 commissioning has started with an initial guidance of 0.7mt (upsides possible) incremental volume in FY25 with full ramp-up over two years. 

No incremental provision at TSUK; BF shutdown over 18 months: 

Following the impairment of Rs27.5bn and restructuring provision of Rs36.1bn taken in Q2, Q3 saw incremental restructuring charge of Rs3bn. Committed support of ~GBP150mn (including GBP20mn to transition fund) could see minor hikes post negotiation. Focus is on the closure of heavy assets (BFs, coke oven, CALP) over 18 months and associated fixed cost reduction. Management expects to halve TSUK losses in FY25, aided also by lower energy costs and better spreads; and operate the downstream facility profitably fed by slab/coil from the captive and external purchases. 

TSN profitability to improve, starting Q4: 

TSN reported a loss of ~US$110/t in M9FY24, given the ongoing relining of BF6. This is expected to restart operations in early Feb’24, at a higher efficiency levels and FY25 volume is expected at 6.5-6.M9t. Combined with improving spreads and lower energy costs, this should result in positive Ebitda for TSN starting Q1FY25.