Visit http://indiaer.blogspot.com/ for complete details �� ��
Standalone numbers in line, Profitability at European operations significantly above estimates
Tata Steel reported Q2FY11 consolidated EBITDA higher than our estimates at Rs36.7bn (our estimates of Rs29.9bn).
While standalone EBITDA was in our estimates; European business EBITDA (US$56/tonne) surprised significantly (our
estimates US$16/tonne); on the back of sharp surprise in realizations. We believe that the same could be on account of
spill-over effect of higher prices in Q1 on contractual sale volumes. Consolidated net profit at Rs19.8bn (+8.4% qoq) was
helped by higher other income on account of sale of non-core investments by Tata Steel India and Nat Steel Holdings.
Consolidated debt remained at US$9.8bn. Jamshedpur expansion remains on track for commissioning by Oct’11;
reflecting in a higher than expected capex guidance for FY11. Tata Steel board has approved raising of additional equity
capital of upto Rs70bn (US$1.5bn); higher end of the total equity raising has surprised us and expect the same to result in
a dilution of 5-8% of earnings.
Overall, we remain positive on Tata Steel. We see a marked change in Tata Steel over the next 8-10 quarters – both
strategically and financially. Losses at the European operations have peaked and restructuring expenses are largely
behind, and the business is set to achieve a leaner structure. Brownfield expansion has gathered momentum and will be
commissioned a year from now. Post expansion in India, domestic operations will account for 34% of steelmaking
capacity but for 63% of consolidated EBITDA. Also, production would commence at the overseas mines in Canada and
Mozambique by FY12, which will lead to improved raw-material integration for the consolidated entity. All this, we
believe, would lead to free cash generation and we expect Tata Steel to enter a phase of balance sheet de-leveraging over
the next 2-3 years. We estimate net debt to reduce by 32% to Rs313bn by FY13E. The stock has underperformed Indian
peers over the last 18 months but we believe a re-rating is on the cards. We maintain Outperformer with a 12-month price
target of Rs811/share – 6.2x consolidated FY12E EV/EBITDA.
Key highlights
Standalone operations
• Standalone revenues at Rs71.1bn (up 8%qoq) was largely in line with our estimates of Rs69.5bn. Blended
realization/tonne at Rs42,812 (down Rs3,700 qoq) was exactly in line with our estimates and sales volumes came at
1.66m tonnes (our estimates of 1.62m tonnes). The 19%qoq increase in sales volumes was largely led by higher
production and a 0.05m tonnes decline in inventory. Our estimate of 6.1m tonnes of steel sales in FY11 looks
achievable at the current run rate, backed by a general uptick in construction demand post monsoons. Long products
sales came at 0.78m tonnes (up 27%qoq) and flat products grew by 13%qoq, largely led by strong auto demand.
• Revenues at its ferro alloy division at 6.0bn (up 13% qoq) were higher than our estimate of Rs4.8bn, led by rising ferro
alloy prices and a higher-than-expected sales volume of 366,000 tonnes (our estimate, 317,000 tonnes).
• EBITDA/tonne of US$339 (down 24% qoq) was largely in line with our estimates of US$347. We expect margins to be
sustainable at current levels on the back of stable steel prices and a high level of raw material integration that the
company enjoys. Operating costs at Rs44.8bn was largely in line with our estimates even as raw material costs
surprised negatively.
• Average tax rate at 25% declined by 840bps qoq Other income at Rs 7.3bn was marginally higher than our estimates of
Rs7.2bn. Resultantly PAT at Rs20.7bn was higher than our estimates of Rs19.2bn
European operations
• EBITDA/ tonne came in at US$56, significantly higher than our estimate of US$15, led by; a) a qoq rise of US$90 in
realizations, which came in at US$1,108 (our estimate, US$1,028); b) lower-than-expected raw material costs/ tonne
which came in at US$444 (our estimate, US$487)
• Steel deliveries of 3.53m tonnes were higher than our estimate of 3.4m tonnes, largely led by higher distribution &
building volumes. At the current rate of production, the company operates at 87% capacity utilization, surpassing
guidance for ~80% utilization levels.
• According to management, the company signed various three months contracts for higher realizations during Q1FY11
which were to be booked in Q2FY11, which led to the positive surprise in realization/tonne. However, management
was cautious about lower realizations and lower steel deliveries in the coming quarter led by; a) an expected
sequential dip in apparent steel demand; b) a seasonal decline during the later half of Q3FY11 resulting in muted
activity across Europe and North America.
• In addition, continued weakness in construction demand which accounts for ~40% of total steel consumption in
Europe and concerns over European sovereign debt/ banking sector and government’s aggressive fiscal cuts present
an additional risk
• Restructuring cost for the current quarter was ~US$7m, lower than our estimate of US$11m. The sequential decline in
restructuring costs imparts confidence on restructuring exercise coming to an end.
• The company launched a ‘Sustaining our Future” programme in H1FY11 targeting continuous improvement in
savings of £25m per quarter over FY11 and FY12.
• Tata Steel Europe approved a £185m investment to rebuild the No. 4 blast furnace at Port Talbot in 2012
Asian (Ex-India) operations
• Natsteel (NSH): NatSteel’s revenue of US$379m (flat qoq) was higher than our estimates of US$345m. The positive
surprise in realization/ tonne which came in at US$824 (our estimate, US$575) was partially offset by lower sales
volumes which came in at 0.46m tonnes. EBITDA at US$58/ tonne was up 31% qoq as against our estimates of
US$20/ tonne. Management guided for a steady recovery in construction activity in Singapore with 10% yoy growth
expected in 2011.
• Tata Steel Thailand (TSTH): TSTH’s revenue for Q2FY11 at US$220m increased by 17% qoq led by higher
realizations/ tonne which came in at US$667 (our estimate, US$600). However, EBITDA/ tonne of US$9/tonne was
significantly below our estimate of US$40/tonne. Management expects improving political stability to improve
demand going forward. Also with the commissioning of the mini-blast furnace there could be volume growth going
forward.
Progress for raw material integration on track
• Mozambique (coal): Tata steel owns 35% of Benga project that Riversdale is developing in Mozambique. Expansion at
its Phase I is likely to be completed by H2 CY11 with a RoM production capacity of 5.3m tpa. Riversdale’s Stage 1
products will be exported from the existing Beira Port. The government of Mozambique is planning for a new Beira
coal terminal with a coal handling capacity of 18-24m tpa. During the quarter the company, through its subsidiary
Tata Steel Global Minerals Holdings Pte Limited, increased its stake in Riversdale Mining Limited, the listed entity in
Australia, from 21.1% to 24.4% by way of open market purchases.
• Canada – New Millennium (iron ore): On completion of feasibility study the company has decided to develop DSO
iron ore project in Canada which has mineral reserves of 64.1m tonnes at a total capex of C$300m. Production of 4m
tpa of sinter fines is expected to commence by the end of FY12. A Joint Venture Company (JVC), named Tata Steel
Minerals Canada Ltd, was incorporated in October 2010 which will acquire all the mining claims and assets relating to
the DSO Project, carry out detailed engineering and facility construction, and be responsible for the Project’s
operations. Tata Steel will own 80% of the JVC and New Millennium (NLM) the remaining 20%.
Brownfield expansion in India gaining significant pace
The 2.9m tpa brownfield expansion at Jamshedpur is gaining considerable pace. Of the total capex of US$2.9bn, around
US$1.3bn has been spent and an additional US$659m will be spent in H2FY11. According to management, project
expansion is on track and commissioning is due by H2FY12; however we conservatively estimate the commissioning of
the same by the end of FY12. Also, the additional 40% capacity (2.9m tpa) would be complemented by a commensurate
increase in captive iron ore supplies. The incremental capacity would largely be for flats and we estimate proportion of
flats to increase to 67% from 53% currently.
Refinancing of senior debt in Tata Steel Europe
The company recently refinanced the entire £3.53bn term loan and revolving credit facilities entered into during the
Corus Group acquisition in 2007. The new financing structure is in two parts: a 5-year loan of €2.2bn and a 7-year loan of
€0.9bn and US$0.4 billion. The £690m revolving credit facilities for working capital purposes will have a tenor of 5 years.
Average rate of interest on the above facilities is at LIBOR + 350bps, as against its earlier rate of LIBOR + 220bps. As a
result, average interest expenses will see an annual rise of £40m. The new facilities are significantly more flexible than the
older agreements, enjoying substantially reduced amortizations over the next four years, lighter financial covenants (no
EBITDA linked covenants for 4.5 years), and the ability to raise additional working capital and term debt from capital
markets to repay the above refinanced loan
Raising of additional capital – quantum higher than expected
The company recently approved the raising of additional capital of up to Rs70bn (US$1.5bn), though the exact mode of
raising was not disclosed. The announcement comes in lines with our expectation (our report dated Oct’10 had
mentioned further equity raising on the cards). Management says the proceeds would be utilized for brownfield capacity
expansion in India, funding its capital requirements for overseas mining projects, capex plans for Tata steel Europe and
various other initiatives which will fuel further growth opportunities of the company. Though we view the above as
long-term positive for the company, we are surprised with the quantum of raising (our estimate, ~US$1bn). We believe
the above proceeds will certainly help fuel growth initiatives, but would be viewed as near-term negative as it would
result in considerable equity dilution (5-9% based on various prices).
Maintain Outperformer
Overall, we remain positive on Tata Steel. We see a marked change in Tata Steel over the next 8-10 quarters – both
strategically and financially. Losses at the European operations have peaked and restructuring expenses are largely
behind, and the business is set to achieve a leaner structure. Brownfield expansion has gathered momentum and will be
commissioned a year from now. Post expansion in India, domestic operations will account for 34% of steelmaking
capacity but for 63% of consolidated EBITDA. Also, production would commence at the overseas mines in Canada and
Mozambique by FY12, which will lead to improved raw-material integration for the consolidated entity. All this, we
believe, would lead to free cash generation and we expect Tata Steel to enter a phase of balance sheet de-leveraging over
the next 2-3 years. We estimate net debt to reduce by 32% to Rs313bn by FY13E. The stock has underperformed Indian
peers over the last 18 months but we believe a re-rating is on the cards. We maintain Outperformer with a 12-month price
target of Rs811/share – 6.2x consolidated FY12E EV/EBITDA.
No comments:
Post a Comment