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Tata Steel (Focus on domestic; reap tailwinds, ADD):
Despite a turnaround at Corus (Tata Steel Europe or TSE), the operating environment remains challenging given the uncertainty in European demand. Though worries on Corus are justified, its weight in earnings and SoTP is fading, due to the fast-growing domestic business (Tata Steel India or TSI). Some key facts: 1) Corus will contribute 27% of EBITDA in FY13 as compared to 42% in FY08; and 2) 26% to consolidated EV in FY11 as compared to 47% in FY08. We believe TSI will continue to drive earnings and SOTP, while fears of TSE requiring cash infusion are far-fetched, barring a severe demand shock. On the other hand, the high leverage is set to abate over the next year driven by: 1) asset sale gains; 2) internal accruals; and 3) fund raising. Lastly, the company’s initiatives on raw-material integration are now getting their due attention. We retain ADD with a target price of Rs722.
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