Firm Indian operations, Corus uncertain Corus to remain under pressure despite strong Q1FY11
Corus’ (TATA Steel UK) Q1FY11 results reinforced the operational
turnaround. However, we expect the next two quarters to be
challenging for the company due to: 1) pressure on utilisation and
2) higher raw material prices should squeeze margins. Despite this,
we believe Corus should be cash positive and EBITDA/t will stabilize
in the range of US$50-70/t from Q3FY11F up from US$30-35/t
expected in Q2FY11F.
However domestic business to remain highly profitable
The company’s Indian operation’s profitability has surprised the street
both through higher realizations and lower costs. Although we expect
EBITDA/t to come down from Q1FY11 levels with the fall in steel
prices, we believe higher volumes will keep absolute profits strong.
Volumes have picked up in Q2FY11, after higher imports had
impacted sales in Q1FY11. We expect consensus earning upgrades
for the India business due to positive surprises in Q1FY11.
Valuations attractive, already factoring uncertainty
We believe steel prices should start stabilizing after the recent
turbulence, as indicated by high scrap prices. The Indian business
remains strong with EBITDA/t of US$ 350-400/t despite the correction
in steel prices. Since there is consensus about strength of Indian
business, we believe the current stock price is ascribing significant
negative value to Corus. We estimate the value domestic business at
Rs753/share (at 10x FY12E EPS). Therefore, the negative value
ascribed to Corus is closer to Rs100/sh. This is unjustified, in our view,
given our expectation that Corus will be cash positive in Q2FY11,
which is typically the worst quarter for them. We value Corus at 5x
EV/EBITDA at EV of US$ 5bn and contributes Rs34 to our target price.
South East Asia business is also valued at 5x EV/EBITDA and
contribute Rs15/share. Rs44 comes from its stake in Riversdale
mining (RIV AU, not covered).
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