Tata Steel (TISCO):Lots of fire under the belly...way to go: ICICI Sec

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Lots of fire under the belly...way to go
Tata Steel’s Q2FY11 results were much better than its peers thanks to
the sustainability at Tata Steel, Europe in the past few quarters and
robust performance of Indian operations. Topline growth (up ~13% YoY
and ~6% QoQ) was aided by improvement in volumes. Also, blended
realisations across all geographies came in line with our estimates at |
28646 crore against expected | 28145 crore. EBITDA also jumped by ~ 8
times YoY (~1130 bps margin growth YoY) mainly due to Tata Steel,
Europe coming in the black since Q4FY10 and sustaining its good run till
date. PAT also remained firm with growth of ~12% QoQ though it was
not comparable YoY as it made losses on a consolidated basis viz. ~|
2700 crore in Q2FY10.


However, blended EBITDA/tonne at Tata Steel,
Europe came lower at $55.8 for Q2FY11 against $79 in Q1FY11. This was
partially led by lack of raw material integration that played the
spoilsport due to higher iron ore and coking coal prices. Going forward,
however, we would like to maintain a cautious stance despite the
sustained performance at Tata Steel Europe. This is due to higher raw
material prices and lack of incremental demand from the European arm
that is likely to make a dent in its performance. We have revised up our
target price to | 677/share and assigned an ADD rating to the stock.

􀂃 Improved volumes, realisations across all geographies
The improved operational performance was broad based with all
regions lending support viz. Indian operations leading the show (up
at 1.66 MT in Q2FY11 vs. 1.4 MT in Q1FY11 and 1.45 MT in Q2FY10),
Europe (average realisations up at $1158/tonne in Q2FY11 against
$1028/tonne in Q1FY11 and $893/tonne in Q2FY10) and Asian
operations also posting relatively better numbers.

Valuation
At the CMP of | 616, the stock is discounting its FY12E EPS by 8.7x and
FY12E EV/EBITDA by 5.4x. We have revised our target price to | 677,
valuing the Indian operations at 6x its FY12E EV/EBITDA and European
and Asian subsidiaries at 5x its FY12E EV/EBITDA. We have assigned an
ADD rating to the stock.