Edelweiss recommends: Buy tata steel: raise target to Rs 781

Raising consolidated EBITDA by ~7% in FY11 and ~10% in FY12
We are revising upwards Tata Steel Europe’s (Corus) EBITDA by 6.7% to USD
841 mn in FY11 and by 5.6% to USD 1.3 bn for FY12, primarily due to betterthan-
expected realisations in Europe. We increase our FY12 EBITDA/t for Corus
from USD 66/t earlier to USD 80/t. For the Indian operations, we raise our
estimated EBITDA to USD 2.3 bn (up 5.7%) and USD 2.4 bn (up 12.4%) for
FY11 and FY12, respectively. This is led by increase in steel prices ahead of
expectations and firm price outlook.
􀂃 2.9 mtpa brown-field expansion on track; to be completed by Dec-11
The 2.9 mtpa brown-field expansion will fully commission by December 2011,
with blast furnace and pellet plants likely to commission in June 2011. We expect
incremental volumes of 0.2 mtpa in FY12 and 2.4 mtpa in FY13 from this plant.
Dhamra port, with 27 mtpa capacity, has just commenced operations.
􀂃 Better visibility on raw material projects; significant long-term value
Tata Steel is executing projects in Mozambique for coking coal and Canada for
iron ore. These projects are gathering pace and are expected to be completed by
end CY11. The company could attain raw material integration of 15-25% through
these projects.
􀂃 Outlook and valuations: Positive stance; maintain ‘BUY’
We continue to believe that margins for non-integrated steel players would bottom
in Q2FY11 and expand thereafter. Steel prices have increased by ~USD 25
recently globally even as contract iron ore and coking coal prices have declined by
~USD 15/t, suggesting this play-out has already started. For Tata Steel
specifically, we see multiple triggers playing out, including Corus achieving
EBITDA/t of USD 80/t in FY12, sale of TCP plant by Q1FY12, ramp-up of Dhamra
port, the 2.9 mtpa expansion and international raw material projects completing
by end CY11. Potential surprises could be through additional sale of non-core
assets. We value international raw material projects at INR 23/share and also
considering increase in our estimates, raise our fair valuation from INR 623/share
to INR 781/share. We maintain ‘BUY/Sector Outperformer’ on the stock.