PINC POWER PICKS: TATA STEEL: BUY, TP-Rs748 (15% upside)

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What’s the theme?
We expect Tata Steel's EBITDA to grow at 49% CAGR over FY10-12, driven by its profitable Indian
operations, turnaround at Corus, improved capacity utilization, leaner cost structure, partial resource
integration, and improving steel profitability. We expect Tata Steel's consolidated net profit to be Rs56.5bn
in FY11 and Rs73.4bn in FY12. We find the stock attractively valued at 4.6x FY12E EV/EBITDA.
What will move the stock?
1) Likely sequential improvement in steel profitability in Q3FY11; 2) Consummation of sale of Teesside
Cast Products (TCP); 3) Easing of high financial leverage with recent debt restructuring at Corus; 4)
Sustainability of turnaround at Corus; 5) Progress on raw material integration; and 6) Brownfield expansion
of 2.9mn tonnes at Jamshedpur as per schedule.
Where are we stacked versus consensus?
Our consolidated estimates are almost in line with consensus. We value Tata Steel using SOTP methodology
at Rs748.

What will challenge our target price?
1) Lower steel profitability on correction in steel prices and/or significant rise in input costs; 2) Weak
recovery in Europe leading to lower capacity utilization at Corus; 3) Delay in Brownfield expansion; and 4)
Delay in resource integration.