Tata Steel
Management meeting takeaways
We met the management of Tata Steel. We sense an increasing willingness by the
company to look at strategic opportunities to raise cash flow and reduce leverage.
That said, we are concerned that: 1) capex needs will remain elevated until FY15E; and
2) we expect product mix to deteriorate further in the near term. While we don’t
doubt the viability of incremental capex, we remain concerned that weak operating
cash flows coupled with firm capex will lead to a further increase in gearing.
Focus on consolidation: Balance sheet consolidation appears to be increasingly a focus
area for the group. That said, we remain sceptical that the European asset sale will go
through smoothly (refer our report dated 11 April, European Assets on the block?). We
think sale of equity holdings (US$1.2bn) and non-core assets is more likely to continue.
We also sensed a need for geographical consolidation in the group. Management said
that the group would be more focused on India and believes that the investment in its
Odisha project is strategically important in terms of long-term business mix, balance
sheet de-risking and maintaining market share in India.
Capex to remain firm: The total capex requirement for Odisha phase I (3mt) has
increased to Rs240bn (vs. Rs190bn earlier) with an Rs80bn outlay p.a. over FY14-FY15.
There is no decision yet on the Orissa phase II project (another 3mt) timelines and
implementation. Tata Steel intends to spend US$500m p.a. in Europe on performance
improvement. There is no large capex planned in the overseas mining subsidiaries.
Product mix to deteriorate further: We have been highlighting that Tata Steel’s
product mix is moving more towards commodity grade HRC with a declining
contribution to the high-margin auto segment. We expect the mix to deteriorate further
in FY14E before improving after the commissioning of the CR mill in Q4FY14E.
Gearing to increase; covenants comfortable: We expect net debt to increase further over
FY15E (to US$12bn). We think debt covenants both in India and in subsidiaries remain
comfortable even after considering recent asset impairments/goodwill write-down.
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Management meeting takeaways
We met the management of Tata Steel. We sense an increasing willingness by the
company to look at strategic opportunities to raise cash flow and reduce leverage.
That said, we are concerned that: 1) capex needs will remain elevated until FY15E; and
2) we expect product mix to deteriorate further in the near term. While we don’t
doubt the viability of incremental capex, we remain concerned that weak operating
cash flows coupled with firm capex will lead to a further increase in gearing.
Focus on consolidation: Balance sheet consolidation appears to be increasingly a focus
area for the group. That said, we remain sceptical that the European asset sale will go
through smoothly (refer our report dated 11 April, European Assets on the block?). We
think sale of equity holdings (US$1.2bn) and non-core assets is more likely to continue.
We also sensed a need for geographical consolidation in the group. Management said
that the group would be more focused on India and believes that the investment in its
Odisha project is strategically important in terms of long-term business mix, balance
sheet de-risking and maintaining market share in India.
Capex to remain firm: The total capex requirement for Odisha phase I (3mt) has
increased to Rs240bn (vs. Rs190bn earlier) with an Rs80bn outlay p.a. over FY14-FY15.
There is no decision yet on the Orissa phase II project (another 3mt) timelines and
implementation. Tata Steel intends to spend US$500m p.a. in Europe on performance
improvement. There is no large capex planned in the overseas mining subsidiaries.
Product mix to deteriorate further: We have been highlighting that Tata Steel’s
product mix is moving more towards commodity grade HRC with a declining
contribution to the high-margin auto segment. We expect the mix to deteriorate further
in FY14E before improving after the commissioning of the CR mill in Q4FY14E.
Gearing to increase; covenants comfortable: We expect net debt to increase further over
FY15E (to US$12bn). We think debt covenants both in India and in subsidiaries remain
comfortable even after considering recent asset impairments/goodwill write-down.
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