Nomura research previews Tata Steel – India business drives, Corus a drawdown

Tata Steel – India business drives, Corus a drawdown
Strong volume growth in 2QFY11
Tata Steel India reported sales volume of 1.66mn tonnnes in 2QFY11, up 18.6% q-q
and 14.5% y-y.
We expect Tata Steel’s UK sales to drop to 3.4mn in 2QFY11, from 3.7mn tonnes in
1QFY11, affected by a demand slowdown in Europe due to summer holidays.
Realization to fall in line with industry
We expect domestic realization to fall by INR2,000/t to INR40,963/t from 1QFY11
levels. Steel prices came down from the highs in 2QFY11,and we expect it to reflect in
lower realizations.
However, management has indicated that the company’s European operations will see
some increase in realizations despite a fall in spot steel prices on account of quarterly
and half yearly contracts. 1QFY11 realizations increased by just US$52/t despite a
spot price increase of more than US$100/t due to similar reasons. We expect blended
realization of US$1,040/t in 2QFY11, up from US$1,028/t in 1QFY11.
Coking coal prices to start impacting from 2QFY11
We expect India businesses’ raw material costs to increase by close to INR3,000/t
primarily on account of high-cost coking coal, which will start to reflect from the quarter.
Please note that Tata Steel requires 50-55% of imported coking coal. Hence, a
US$100/t increase in coking coal prices, from last year, will result in an abovementioned
raw material cost increase. We expect ex raw material costs to decrease by
INR2,378/t q-q primarily on account of operating leverage resulting from higher sales
volume.
For Corus, a part of the raw material price hikes had already flowed in 1QFY11; hence,
we are building in US$60/t of cost increase on higher raw material costs.
2QFY11 profitability to drop – 1QFY11 was too strong a quarter
As a result of the above, we expect India businesses’ EBITDA/t to fall from INR20,891
in 1QFY11 to INR16,668/t in 2QFY11. 1QFY11 was a very strong quarter despite
lower volumes, as not only were realizations higher, but also costs were lower (as raw
material prices didn’t increase). For 2QFY11, we expect lower realizations as well as
increased costs. However, we expect the impact of lower EBITDA/t to be mitigated by
higher volumes, and overall EBITDA at INR27.7bn should be slightly lower from
INR29.2bn in 1QFY11, in our view.
We expect Corus’ EBITDA per tonne to fall from US$79/t in 1QFY11 to US$40/t in
2QFY11. Overall EBITDA will fall much sharply as volumes will also be lower during
the quarter.
Standalone profits hold ground – Corus to dent consolidated
profits
We expect Tata Steel India’s business to report net profit of INR15.6bn in 2QFY11, flat
q-q. Lower EBITDA should be compensated by slightly higher other income and lower
tax rates (from 33% in 1QFY11 to 31% in 2QFY11).
We expect Corus to report a loss of US$50mn during the quarter. We look for
consolidated profit of INR13.4bn during the quarter, down from INR18.3bn in 1QFY11
primarily on account of weaker performance from Corus.