Tata Steel BSL’s (TS-BSL) Q2FY21 performance surpassed our estimate. Key highlights: Blended realisation uptick led by higher proportion of downstream products and lower exports. Gross debt down by Rs 1,500 crore owing to prepayment. Working capital release aided cash accretion.
We remain positive on TS-BSL due to possibility of further improvement in profitability from higher downstream shipments; deleveraging focus; and multi-pronged cost reduction initiatives. We believe Tata Steel (TSL) will benefit from resurgence in performance of Tata Steel Long Products and TS-BSL. Maintain ‘BUY’ with target price of Rs 500/share on 6.4x FY22E EBITDA.
TS-BSL’s performance surpassed our estimates on all fronts. EBITDA/t jumped 73% YoY to Rs 8,649 — the highest level since Q1FY20 — on operating leverage benefits and lower cost. Proportion of exports declined to 30% (Q1FY21: 50%) and downstream products increased to 32% (Q1FY21: 24%). Raw material cost savings led to Rs 700-800/t benefit.
Cost reduction in multiple areas such as procurement, logistics etc., kept other expenses on leash. Going ahead, we expect operating performance to get a leg up from higher downstream proportion as automotive shipments ramp up, focus on the more profitable domestic market and cost control.
We are also positive on the unwavering balance sheet focus. Cash flow from H1FY21 operations was at Rs 27.8bn (H1FY20: Rs 3.2bn; FY20: Rs 17.1bn) despite a very challenging Q1FY21.
Key highlights for H1FY21: Pre-payment of total debt of Rs 1,500 crore. Working capital unlocking of Rs 1,100 crore due to reduction of receivables and inventory. Reduced capex intensity–down at Rs 0.9bn compared to Rs 4.8bn in H1FY20. As a result, cash and equivalents at H1FY21 end stood at Rs 8.0bn, up from Rs 7.2bn in March 2020 end. Going forward, we expect cash accretion to improve owing to higher EBITDA generation.
We are positive on improved operating performance and sustained focus on deleveraging the balance sheet. We believe record CRC-HRC spread of Rs 9,830/t and higher automotive shipments will aid TS-BSL’s profitability.
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