Strong quarter but leverage stalls growth plans. Tata’s 4QFY20 EBITDA was higher than expected mainly led by a positive EBITDA in Europe. Weak demand and prices would keep margins under pressure in 1HFY21E. High leverage has forced Tata to delay growth capex but would restrict further increase in debt. We have cut our EBITDA estimate by 2% for FY2021 and our fair value to Rs 400 (from Rs 430). Stock a 0.5X P/B is pricing all concerns and ignoring the recovery potential in FY2022E. Maintain ‘buy’.
Tata’s standalone 4QFY20 EBITDA of Rs 36.5 bn (-26% yoy, +10% qoq), was 2% higher than our estimate (KIE: Rs 35.9 bn) led by higher realisations partly offset by lower volumes. Europe EBITDA of Rs $9 m or margin of $4/tonne was higher than our estimate of an EBITDA loss.
Standalone volumes declined 19% yoy to 2.91 m tonne (-15% qoq) due to a nation-wide lockdown in the last week of March. Realization at Rs 48,786/tonne increased 10% qoq led by front ended price increases during the quarter. We estimate -5%/13% yoy volumes and -13%/+33% EBITDA/tonne in FY2021/22.
EBITDA/tonne recovered to $4/tonne from a loss of Rs $57/tonne in 3QFY20 led by stronger spreads and lagged impact of lower raw material prices. Management continues to work on its cost reduction programme and expects benefits to be visible from 2HFY21E and FY2022E. It is currently in discussions with regulators in UK and the EU for government support. Europe reported EBITDA loss of $94 m (-$10/tonne) in FY2020 and we forecast a $188 m loss (-$24/tonne) in FY2021E given weak market dynamics and high operating leverage.
Tata has exported ~50% of its domestic volume in 1QFY21 against ~14% in FY2020. With delayed recovery in domestic demand, reliance of exports would remain high in 1HFY21E. Exports earn Rs 4,000-5,000/tonne lower realisation or margins due to benefit of import duty in domestic prices. We expect exports to reduce to normal levels from 2HFY21E, however, a slower recovery in domestic demand would imply further downside risk to earnings.