Spike in debt disappoints Tata Steel's reported Q3FY14 Ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 40 bn was broadly in line with positive surprise at TSE (Tata Steel Europe) and disappointment at domestic business. An increase of Rs 58 bn in net debt disappointed; management attributed the increase to the seasonal build-up of inventory. We are positive on European business but are concerned about (i) weak domestic demand, (ii) increasing debt and (iii) an unfavourable risk-reward ratio, especially against the backdrop of the event risk of Shah Commission report. We downgrade the stock to Reduce from Add. TP (target price) increases marginally to Rs 400 from Rs 395 earlier.
Adjusted Ebitda in line with our estimate, TSE shines, India disappoints.
A consolidated Ebitda of Rs 40 bn (+79% y-o-y, +8% q-o-q) was 6% better than our estimate, but included reversal of R2.3 bn of excess electricity charges paid by TSE. Standalone Ebitda of R29.4 bn (+16 % y-o-y, flat q-o-q) missed our estimate by 10% due to (i) lower-than-expected realisation and (ii) higher-than-expected forex loss of R800 m. TSE’s Ebitda of R8.6 bn was 110% ahead of our estimate; adjusting for one-off, Ebitda was $101m and Ebitda/ tonne at $32, ahead of our estimate. Net income of R5 bn missed our estimate by 16% due to higher-than-expected tax rate.
Cuts back on India volume guidance but maintains relatively positive outlook for TSE.
Management expects ~8.8m tons of steel deliveries in FY2015 (estimates), down from 9m+ tonne guided earlier. Volume guidance has been drifting down for the India business, though not a surprise considering weak demand. TSE expects 4m tonne of steel deliveries in Q4FY14, translating into FY2014e shipments of 13.8m tonne (+6 % growth). Deliveries at TSE may be a tall ask. High inventories at TSE of 2.6m tonne (70 days) is a touch worrying even as the management attributed this increase to the normal seasonal build-up of inventory.
Net debt increases further, dashing hopes of deleveraging.
Net debt, including hybrid perpetual securities, increased Rs 58 bn q-o-q to R724 bn at end-Dec 2013. Management attributed the increase to the seasonal build-up of inventory and capex of R39 bn in the quarter. Increase in debt has been higher than expected and calls for revision in peak debt number, which we believe would be closer to R755 bn as compared to our earlier estimate of R705 bn.
Downgrade to Reduce after