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Published on 31/07/2018 3:10:57 PM | Source: Motilal Oswal Securities Ltd

Annual Report Tata Steel FY18 - Motilal Oswal

TATA STEEL FY18

Tata Steel’s FY18 annual report analysis highlights improved operating performance, with EBITDA increasing 29% to INR218.9b, primarily led by standalone operations. Restructuring of pension scheme led to an exceptional gain of INR138.5b (66% of PBT) and overfunded status of INR194.1b. However, consolidated operating cash flow declined to INR80.2b (FY17: INR108.2b) due to pension settlement payout of ~INR46.7b and increase in standalone cash conversion cycle from 19 days to 41 days. Adjusted for the settlement payment, EBITDA-CFO conversion remained muted at 71% (FY17: 75%). Consolidated adjusted (to forex impact) gross debt increased to INR915.5b (FY17: INR882.9b) due to increased indebtedness of subsidiaries, while adjusted net debt declined to INR687b (FY17: INR776.9b), aided by rights issue of INR91b. Impairment losses, primarily in Canada mining business, were INR11.6b, 10.2% of PBT before exceptional items. Contingent liability increased to INR139.8b, 23% of net worth (FY17: INR121b, 34% of NW) due to demand raised by authorities for excess production.

Subsidiaries’ margins muted despite higher realizations:

Consolidated revenue grew 13.3% to INR1,330.2b (FY17: INR1,174.2b) aided by increased realization. While standalone EBITDA margin expanded 400bp to 25%, weak operating performance at subsidiaries (derived EBITDA margin flat at 8%) contained consolidated EBITDA margin – up 200bp to 16%.

Pension settlement – overfunded status, future costs to remain low:

With TSE favorably restructuring its pension scheme, benefit obligations declined, in turn leading to (a) overfunded status of INR194.1b (FY17: INR6.6b), (b) exceptional gain of INR138.5b (66% of PBT), and (c) cash outlay of ~INR46b (GBP550m). Also, due to lower actuarial assumptions under restructured scheme – nil salary growth v/s 1.5% earlier and 2.1% pension growth v/s 3.1% earlier would result in lower future pension costs.

Working capital dents cash flows:

Standalone EBITDA-CFO declined to 75% (FY17: 94%) due to increase in cash conversion cycle from 19 days in FY17 to 41 days in FY18. This led to INR8.2b investment in working capital against release of INR11.5b in FY17. Consolidated CFO declined to INR80.2b (FY17: INR108.2b), impacted by one-time settlement payout of INR46.7b (GBP550m). Adjusted for this, EBITDA-CFO remained muted at 71% (FY17: 74%); though FCF improved, it remained negative (-INR3.3b v/s -INR27.6b in FY17).

Net debt decline aided by rights issue:

Consolidated gross debt increased to INR951.5b (FY17: INR858.7b) due to rise in indebtedness of subsidiaries and adverse forex impact. Adjusted for forex impact, consolidated gross debt stood at INR915.5b (FY17: INR882.9b); while, net debt declined to INR687.0b (FY17: INR776.9b) aided by rights issue of INR91.1b.

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