Tata Sponge Iron: Expect margin expansion in 2HFY11- Buy: Motilal Oswal

Visit http://indiaer.blogspot.com/ for complete details �� ��


 Tata Sponge's 2QFY11 adjusted PAT grew 52% YoY to Rs246m (up 111% QoQ) due to better operating performance
and higher sponge iron prices. Reported PAT was Rs104m, affected by an iron ore price hike of Rs142m pertaining to
1QFY11.
 Sponge iron production increased 15% YoY to 101,400 tons. The company achieved record capacity utilization of
104% due to strong demand and improved operating performance.
 Net sales grew 47% YoY to Rs1.76b (up 24% QoQ) due to higher sponge iron volumes and realizations. Sponge
sales volumes increased 32% YoY to 108,000 tons and average realization was up 14% YoY at Rs14,842/ton.
 Adjusted EBITDA increased only 11% YoY to Rs303m. In the reported numbers, Rs142m pertaining to an iron ore
price hike in 1QFY11, was included in raw material (RM) expenses. We reduced this amount from RM expenses in
2QFY11 and added it to 1QFY11, which have been restated. EBITDA per ton was flat YoY at Rs2,808/ton (~US$65/
ton).


Expect margin expansion in 2HFY11; valuations attractive
 We expect strong growth in 2HFY11 earnings due to higher sponge iron prices. (Currently prices are prevailing at
about Rs17,000/ton v/s average realization of Rs14,842/ton in 2QFY11) and no increase in input costs. Iron ore
prices with Tata Steel have been negotiated and no further price hike is expected in 2HFY11.

 Tata Sponge is better placed due to secured iron ore supply and long term pricing arrangements while the competition
is struggling to secure iron ore due to the closure of many iron ore mines in the Barbil region and volatility in prices.
 The stock trades at attractive EV/EBITDA of 2.4x FY12E and P/E of 6x FY12E. Maintain Buy.