Tata Steel: Reiterate Buy (On CL) : Goldman Sachs

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Tata Steel (TISC.BO): Reiterate Buy (On CL)
We reiterate Buy (on Conviction List) on Tata Steel with a revised 12-month target price of
Rs 752, implying 26% potential upside. Tata Steel continues to be attractively valued and
remains our top pick in the metals space as we believe the current price does not reflect
Tata Steel’s strong growth trajectory (46% FY10- FY13E EBITDA CAGR) and improving
return profile, driven by robust profitability at India operations and sustainable recovery at
Tata Steel Europe.


 Compelling valuations: Tata Steel is trading at mid cycle valuations, despite above
mid-cycle ROEs and margins. In our view, at current price levels, the market is
assigning unjustifiably low value to Tata Steel’s Europe operations, which we believe
should surprise the street on the upside during its forthcoming 2QFY11 results. On
earnings based multiples, the stock is trading at 4.6X FY12E EV/EBITDA, at 26%
discount to mid-cycle of 6.2X and 20% discount to peers.

 Sustained strong profitability at its India business: In our view, Tata Steel’s
India business will continue to outperform its peers, given its high vertical integration
and 42% share in the high-margin automotive sector. We expect US$394 of EBITDA/ton
in FY11E, twice that of its Indian peers.

 Sustainable recovery at Tata Steel Europe, despite near-term headwinds:
Despite the near-term headwinds in the European steel market, we believe that post
the restructuring in FY10, the company is in a much better operating position to
weather adverse industry dynamics, given its location/product mix advantage and
successful cost reduction initiatives.

Our European Steel research team recently revised down steel price assumptions by
1%-7% for FY11E-FY13E to incorporate a slower-than-expected recovery in demand
and pricing in 4Q and the increased attractiveness of Europe as an import zone. In spite
of relatively buoyant macroeconomic data (Euroland PMI, French and German
business confidence) and end-user demand (from capital goods and automotive
OEMs), distributors seem reluctant to build inventory as improved visibility on raw
materials and regional bifurcation has allowed a greater degree of control over
purchase prices. This could lead to greater volatility in future inventory cycles and
reduced utilization rates in the near term, in our view. We lower our FY11E-FY12E
Corus EBITDA/ton to US$51/$73 (from US$63/94 previously) on lower steel price
assumptions and higher costs.

We revise our FY2011E-FY2013E consolidated EPS estimates by -5% to -10% to account
for revised commodity price assumptions and exchange rate assumptions.
Subsequently, we revise our 12-month P/B-based target price to Rs752 (from Rs769
previously), implying 26% potential upside. Key risks include slower-than-expected
demand recovery and pricing at Tata Steel Europe.