India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Limited
Crossing the Rubicon
Investment rationale
Indian operations: Focus on value-added volume growth
Indian operations of Tata Steel Limited (TSL) are in the midst of 3.05mtpa
crude steel expansion, increasing the capacity to 9.9mtpa by 3QFY12e. The
focus is on value-added products, which will maintain an EBITDA of USD350/
tonne despite initial lower cost raw material integration. The management has
accelerated the groundwork for the next expansion of 6mtpa in Orissa and
has set sights on FY14e for commissioning.
European operations: Restructuring is ongoing
European operations face near term headwinds from raw material costs but
ongoing restructuring is expetced to increase profitability from the present
EBITDA levels of ~USD50/tonne. The 3mpta TCP sale for USD500m is on
track and expected to be consummated by FY11e end. The management is
now focusing on efficiency projects by increasing annual capex to USD600m
from present USD350m.
High visibility on improving raw material integration
Projects like 4mtpa iron ore (starting with 2mtpa initially) at Canada and
2mtpa coal at Mozambique will start delivering by FY12e end. This coupled
with growing Indian volumes, TSL will increase iron ore integration from 26%
to 39% and coking coal from 16% to 23% by FY13e.
Valuation and outlook
TSL is very well placed with strong Indian operations, raw material integration
visibility in the longer term and improving European operations. The proposed
balance sheet deleveraging will bring a flexibility in capital decisions and
TSL will be the prime beneficiary of the upturn in steel industry.
At the CMP of INR673, TSL is trading at 6.2x FY12e EV/EBITDA and is
attractively placed in Indian metals space. We have valued integrated and
efficient Indian operations at 7x EV/EBITDA, while non-integrated European
and Asian operations are valued at 5x arriving at an SOTP of INR768. We
reiterate our BUY recommendation with an upside of 14% from current levels.
Investment rationale
Well-balanced operations by FY13e
Tata Steel Limited's 3.05mtpa crude steel brownfiled project at Jamshedpur (India)
and small incremental additions to NatSteel and Tata Steel Thailand will enhance the
finished steel-sales to 28mtpa by FY13e.
Early entry in value accretive raw material projects
Tata Global Minerals is the key piece in TSL's raw material integration strategy. The
increasing visibility on raw material projects in Canada and Mozmbique is favourable
for long-term raw material integration.
TSL has 24.16% stake in Riversdale Mining Limited (RML), which is an ASX listed
miner with market capitalisation of USD3.5bn and interests in various coking coal
projects. The early stage investment has yielded significant returns with ~4x value
appreciation and raw material security as Benga Coal Phase I (4bt reserves) will start
delivering 2mtpa coal from FY12e end.
Balance sheet deleveraging in the offing
The management has proposed fund raising of USD1.5bn through various options
with deleveraging being the keyword. The debt refinancing at Corus coupled with its
fund raising plan would provide flexibility to the management to focus on efficiency
and growth projects. This will help in expanding the present EBITDA of USD~50-60
per tonne in European operations.
Valuation and outlook
TSL is very well placed with strong Indian operations, raw material integration visibility
in the longer term and improvement in European operations. The proposed balance
sheet deleveraging will bring flexibility in capital decisions and TSL will be the prime
beneficiary of the upturn in steel industry.
At the CMP of INR673, TSL is trading at 6.2x FY12e EV/EBITDA and is attractive
placed in Indian metals space. We have valued integrated and efficient Indian
operations at 7x EV/EBITDA while non integrated European and Asian operations
are valued at 5x arriving at SOTP of INR768. We reiterate our BUY recommendation
with an upside of 14% from current levels.
No comments:
Post a Comment