India in line, Europe surprises positively: Tata Steel’s (TS) consolidated Ebitda at R42.1 bn (+18% year-on-year) came in line with DBe (Deutsche Bank estimate) and consensus. While performance of Indian operations was in line with Ebitda at R32.6 bn (+15% y-o-y), the performance of TS Europe was better than expected with Ebitda/t (earnings before interest, taxes, depreciation and amortisation/tonne) rising by 26% y-o-y to a three- year high of $49/t (vs DBe at $45/t) reinforcing our positive view. Recurring earnings at R6.4 bn (-37% y-o-y) were 10% below DBe on higher depreciation and interest costs. Reported earnings were impacted on account of net exceptional loss of R2.6 bn related to non-cash write down at Benga coking coal project. We raise our target price by 11% to R665 as we roll forward to FY16.
Tata Steel Europe
Tata Steel’s European operations reported a better than expected operating performance in Q1FY15Q with Ebitda/t expanding by $15/t q-o-q to $49/t, which was 7% above DB expectations of $45/t. While steel deliveries at 3.2 mn tonnes (+2% y-o-y) were in line with DBe, blended steel realisations increased 8% q-o-q supported by a combination of lagged impact of improved spot prices and higher proportion of differentiated steel product sales (+20% vs FY14) and drove the earnings surprise.
Outlook: The steel demand environment outlook in Europe is continuing to improve. Eurofer has increased its CY14 apparent steel consumption forecast to +3.7% (vs 3.4% earlier) and expects the demand recovery to continue in CY15 with a demand forecast of +2.9%. We believe that Tata Steel is well positioned to benefit from the improving profitability outlook for European steel makers as the benefits of its operating cost saving initiatives should begin to reflect in its profitability numbers as its utilisation rate increases. European HRC spreads have been normalising as we approach a seasonally weak period. However, the spreads are still higher than historical (24 month) average and should find support from improving demand outlook in Europe.
Tata Steel India
Tata Steel’s Q1FY15 standalone Ebitda at R32.5 bn (+15% y-o-y) came in line with DBe. Saleable steel sales volumes were up 5% y-o-y to 2.1m tonnes while Ebitda/t at R15,504 was marginally (-2%) below DBe on account of higher employee costs related to provisioning over employee retrials. Tata Steel India's value added product mix has insulated the company from a weak demand environment in