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Tata Steel could eye a higher than targeted deleveraging after tax cut

Tata Steel’s Indian operations currently contribute 19.6 million tonne (mt) or roughly around 57% of its total installed crude steel capacity of 34 mt..

, ET Bureau|
Sep 23, 2019, 05.09 PM IST
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Tata Steel
For FY19, the effective tax rate of Tata Steel standalone operations was around 35%, implying a 980 bps benefit on tax rate on implementation of the new tax rate.
Tata Steel is likely to be a key beneficiary of the recent government decision to reduce corporate tax rate since it has a higher margin business operating from India, according to a latest research report by ICICI Direct. While Tata Steel has plans to reduce its consolidated debt by $1 billion, the recent tax cuts can also help the company to exceed its current deleveraging target, the report added.

Tata Steel’s Indian operations currently contribute 19.6 million tonne (mt) or roughly around 57% of its total installed crude steel capacity of 34 mt. Hence, domestic operations contribute a lion’s share of Tata Steel’s earnings before interest taxes depreciation and amortisation (EBITDA) and profit after tax (PAT). “Over the last few years the company has focussed on increasing domestic steel capacity. Going forward Tata Steel is planning to increase India capacity to 30 mt by 2025 through organic and inorganic routes, the report said. “Over the long term, Tata Steel plans to increase its share of domestic operations further to 71% by 2025. Recent tax cuts would benefit Indian operations wherein share of domestic volumes is on an increasing trend,” it added.

While the first half of FY20 saw muted demand and weakness in steel prices from key user industries like automobiles, a post monsoon pick-up in economic activity and steps taken by the government to spur investment is expected to result in a better second half, compared to the first half of the year.

For FY19, the effective tax rate of Tata Steel standalone operations was around 35%, implying a 980 bps benefit on tax rate on implementation of the new tax rate. Going forward, on the back of a likely improvement in market conditions, ICICI Direct said it had revised upward its EBITDA per tonne estimates for FY20E and FY21E to Rs 11,650 per tonne and Rs 12,500 per tonne respectively from earlier estimates of Rs 11,500 and Rs 12,000.
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