Raw Material purchases impact EBITDA: Tata Steels standalone revenues for
2QFY2016 declined 12% yoy to Rs9,531cr (7% ahead of our estimate of
Rs8,879cr), led by better than expected volumes and pricing. However, increased
raw material expenses on account of external purchases of iron ore resulted in the
EBITDA declining sharply by 40% yoy to Rs1,862cr, 3% below our expectation of
Rs1,918cr. The adjusted net profit nearly doubled to Rs3,844cr led by a sharp jump
in other income on account of gains from sale of quoted investments of Rs3,505cr,
while interest expenses were lower on account of debt repayments in 1QFY2015. Overseas operations remain under pressure: The EBITDA of the European
operations turned negative, led by a steep decline in realisations and on account
of lower volumes. Tata Steel Europe (TSE)’s sales volumes declined 3% yoy to
3.27MT, 7% below our expectation of 3.53MT. Realisation declined 20% yoy to
$798/tonne, but 10% ahead of our estimate of $723/tonne. SEA volumes
continued to remain under pressure, with deliveries declining 27% yoy to 0.69MT.
Outlook and valuation: Given the weak outlook on steel prices and with the
European business already in the red at the operating level, we expect tough
times to continue for the stock. The stock is currently trading at an EV/EBITDA of
6.8x FY2017E EBITDA. We retain our Neutral rating on the stock.

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