Tata Steel:Upgrading FY11 EPS by 14% -Motilal Oswal

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Tata Steel (TATA IN; Mkt Cap USD11.9b, CMP Rs606, Neutral)

Tata Steel's 2QFY11 consolidated adjusted PAT declined 30% QoQ to Rs13.1b  

Tata Steel's board has approved the raising of Rs70b of equity related instruments for investing in high RoI projects (Indian Greenfield and overseas Raw Material). This will dilute equity by 10-15%. 

The stock trades at an EV/EBITDA of 6x FY12E. Although valuations are not demanding, the near term outlook is challenging. Equity dilutions and significant capital deployment in future projects will limit the 

upside. Maintain Neutral.

Tata Steel to raise Rs70b equity to fund strategic projects

 Tata Steel's board approved raising Rs70b of equity related instruments for investment

in high RoI projects. This will dilute equity by 10-15%. The funds raised will be deployed

in capex at Indian greenfield projects, iron ore projects in Canada and coking coal

projects in Mozambique.

 The expansion of capacity at Jamshedpur to 10mtpa is on track for completion by

December 2011. The layout of the site has posed challenges in project execution

without disruption of production. We expect a gradual production ramp-up due to

layout difficulties. Capacity expansion will provide additional volumes at Tata Steel

India. Coking coal production from captive mines may not be able to keep pace,

increasing dependence on imported coking coal.

 The Mozambique and Canadian raw material initiatives will consume capital in the

near term though benefits to bottomline can be expected from FY13.

Analyst meet highlights: strong growth in domestic consumption, European

environment challenging

 Indian finished steel demand is expected to grow at 10-12% over the next two years

led by buoyancy in end user segments such as automobiles, consumer durables and

investment in infrastructure.

 Ongoing 2.9mtpa expansion at Jamshedpur is expected to be completed on schedule

in 2HFY11. TSI has incurred capex of Rs57.3b so far and is expected to incur Rs29.6b

in 2HFY11.

 Countries such as China, Australia and Vietnam, where Natsteel operates, are expected

to post positive GDP in 2010 due to strong demand from the construction sector.

 The demand and pricing environment is challenging in Europe due to poor economic

conditions and seasonal factors. The lag effect of higher raw material prices that

were contracted in 2QFY11 and the lag effect of lower steel prices in 2QFY11 will

depress margins. But margins are expected to improve in 4QFY11 on expectation of

better prices, stronger market conditions and lower raw material costs.

 The UK economy will react to the government's comprehensive spending review.

The UK government is assessing spending on infrastructure and construction.

 Gross debt increased by 631m to US$12.5b in 2QFY11. This increase in gross debt is

mainly due to incremental drawings for ongoing expansion at Jamshedpur, Dhamra

port and Tata NYK. Net debt at group level increased proportionately to US$10.7b.

Upgrading FY11 EPS by 14%; maintain Neutral

 We are upgrading FY11 EPS by 14% to Rs74.4 to factor in stronger-than-expected

performance in 2QFY11.

 The stock trades at P/E of 8x FY12E and EV/EBITDA of 6x FY12E. Though valuations

are not demanding the near term outlook is challenging. Equity dilutions and significant

capital deployment in future projects will limit upside. Maintain Neutral.