● Consolidated EBITDA beat our estimates by 18%, with Rs5.1 bn
of the Rs5.2 bn surprise coming from Europe; slightly better
operations in India offset weakness elsewhere. Net profit was
substantially higher due to leverage and non-recurring tax gains.
● The EU surprise though was far from convincing; while sentiment
has improved, business hasn't. The EBITDA/t surprise was likely
due to fixed costs getting transferred to inventory. With high
inventory, spot prices weak and intent to regain share, this does
not portend high margins ahead.
● Caution on Phase II is welcome news even if it means Phase I will
be suboptimal. But debt is still an issue: 1Q saw a minor rise in
debt due to higher working capital, but large drawdowns linked to
capex are ahead. We expect US$12 bn-plus of debt by FY15.
● Having fallen dramatically this year, the stock was due a bounce,
esp. with global IP recovering. The reported gains in EU may
make these persist a few months. But we would use the
opportunity to cut positions, as problems of oversupply and rising
debt are likely to last several years.
��
of the Rs5.2 bn surprise coming from Europe; slightly better
operations in India offset weakness elsewhere. Net profit was
substantially higher due to leverage and non-recurring tax gains.
● The EU surprise though was far from convincing; while sentiment
has improved, business hasn't. The EBITDA/t surprise was likely
due to fixed costs getting transferred to inventory. With high
inventory, spot prices weak and intent to regain share, this does
not portend high margins ahead.
● Caution on Phase II is welcome news even if it means Phase I will
be suboptimal. But debt is still an issue: 1Q saw a minor rise in
debt due to higher working capital, but large drawdowns linked to
capex are ahead. We expect US$12 bn-plus of debt by FY15.
● Having fallen dramatically this year, the stock was due a bounce,
esp. with global IP recovering. The reported gains in EU may
make these persist a few months. But we would use the
opportunity to cut positions, as problems of oversupply and rising
debt are likely to last several years.
Strong results, but unconvincing
Consolidated EBITDA beat our estimates by 18%, with Rs5.1 bn of
the Rs5.2bn surprise coming from Europe; slightly better operations in
India offset weakness elsewhere. Net profit was substantially higher
due to leverage and non-recurring tax gains.
The improvement in Europe though was far from convincing; while
sentiment has improved, business hasn't. The sharply higher-thanexpected EBITDA/t in Europe was likely due to fixed costs getting
transferred to inventory. As per Tata, £58 mn of the £91 mn in
EBITDA came from fixed cost reduction due to higher production. As
this higher production mostly went to inventory (sales volumes did not
pick up), the company stated intent to regain share, and spot prices
weakened towards the quarter end. It is hard to get excited by the
reported EBITDA. Further, 1Q is seasonally the strongest quarter.
Caution on Kalinganagar Phase II welcome, but not enough
For the first time Tata management sounded cautious on Phase II
expansion (another 3mtpa) at Kalinganagar. So far, its approach was
to explain the necessity of Phase II. Given the integrated nature of the
development, even the returns on Phase I may be hurt if Phase II
didn't come up: "it's not even two phases" was the remark. While
Phase II is not part of our or consensus numbers, this helps sentiment
but the capex on Phase I remains an overhang.
Net debt went up marginally (US$150 mn) likely due to higher working
capital. The Kalinganagar capex drawdown is likely in 2H FY14. We
expect debt to be US$12 bn-plus by end-FY15.
Other takeaways from the conference call
● Global mining gains weak: weak RM prices hurt, but so did project
specific issues: disruptions due to heavy rains in Benga
(Mozabique coal: 2H should be better), and slight delays in DSO
(Canada ore: ramp to 3mtpa in FY15 from 1mtpa this year).
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