At the current market price, Tata Steel is trading at 9 times FY19 estimated earnings, which is reasonable
Firm steel prices and better demand has helped Tata Steel report a strong set of Q1 FY19 earnings. The domestic business has benefited the most, led by higher steel prices.
During Q1, it reported a strong 22 percent year-on-year revenue growth. This was led by 19 percent realisation growth to over Rs 55,000 a tonne and robust volume growth. Domestic business, which saw an 8 percent volume growth, was the biggest contributor, pushing overall group earnings before interest, depreciation, tax and amortisation (EBITDA) by 32 percent. Domestic business earned an EBITDA of about Rs 17,252 per tonne, up 61 percent.
That apart, Europe made decent gains on account of better cost management and spread, leading to higher profits.
Europe saw an EBITDA of close to Rs 6,800/t as against Rs 4,533/t in Q4 and Rs 5,210/t in Q1 FY18. Robust performance from the domestic as well as international businesses led to strong growth in the June quarter.
In the case of Tata Steel, it would be worth keeping an eye on integration of Bhushan Steel, which has greater scope for improvement than what the market may be factoring.
During Q1, Bhushan Steel clocked a volume of close to 0.85 million tonne and produced an EBITDA of Rs 9,800/t, which is about half of Tata Steel’s standalone EBITDA/t. It is expected to see an annual production of 5 MT and has a lot more leeway in terms of improving EBITDA per tonne if steel prices remains firm.
At the current market price, Tata Steel is trading at 9 times FY19 estimated earnings, which is reasonable. There is scope for a re-rating once clarity emerges about Bhushal Steel and its ongoing bid for Bhushan Power.Coal India
Benefits of past efforts are now yielding results and translating to better profitability for Coal India. Its biggest concerns such as escalating cost, particularly employee and other cost pressure, are now seen to be receding.
The management has been passing on additional cost to customers in the form of transport and evacuation charges along with price hike. Moreover, e-auction realisation is up 51.3 percent YoY at Rs 2,399/t.
This is taking place at a time when volumes are coming back and coal prices are firm. During Q1, overall realisation grew 10.4 percent to Rs 1,477/t and volumes grew 12 percent to 153.5 MT, which had a significant impact on revenue and profit. This is also the reason why operating margin saw a 525 basis points improvement to 24 percent, leading to strong earnings growth.
Valuations and outlookCoal India, which is trading at 12 times FY19 earnings, is attractively valued, particularly in light of earnings growth and improving return ratios. The company has guided to better volumes this year as a result of evacuation issues getting resolved and strong demand from industries. The full impact of price hike and other levies would be visible in coming quarters, thus positively impacting earnings.Moneycontrol Research page