Tata Steel analyst meeting highlights: FPO issue hits the market:: Daiwa research

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What has changed?
• We attended an analyst meeting organised by Tata Steel for its forthcoming
follow-on public offering (FPO). The company plans to issue 57m shares for
the offering, of which 1.5m will be for its employees.

Impact
• FPO structure: The FPO issue of 57m shares is likely to result in equity
dilution of 5.8% on a fully diluted basis. The price band set at Rs594-610 is
expected to raise Rs34-35bn for the company.  The issue opens on 19 January
2011 and closes on 21 January 2011.
• Usage of FPO proceeds: The FPO proceeds will be used to fund the
Jamshedpur expansion of 3m tpa (expected  to be commissioned by 2H FY12)
to the extent of Rs18bn, and Rs10bn would be used to repay debt. The net debt
as at September 2010 stood at US$10.7bn. The capital expenditure likely to be
incurred for the  Jamshedpur 3m tpa expansion is around Rs160bn. Already
Rs70bn has been spent through internal  accruals. With the FPO proceeds, the
equity investment in the project will be around Rs90bn and the remaining
investment will be funded through debt and internal accruals.

• The company expects its India division  to remain 100% integrated in terms of
iron ore and 50% integrated on coking coal even post the 3m tpa Jamshedpur
expansion.  
• Australia flood, coking-coal crisis. The company gets 40% of its coking-coal
requirements from Australia and management has indicated that the impact of
the floods on its supply would be minimal as it currently has three months of
coking-coal inventory. However, if the flood crisis continues longer than that,
its supply may be affected.
• Liquidity: Apart from this FPO issue and internal accruals, the company should
derive liquidity from the Teeside sale (scheduled to close by March 2011) and
divestment of its group companies.
• Outlook: Management expects demand to remain strong in 1H11 in Europe
with inventory in the system being low. We believe this would help Tata Steel
maintain its pricing power in Europe and pass on any raw-material cost push.
We expect the company’s 3Q FY11 results to be subdued due to ASP pressure
in Europe. However, management has also indicated that there would be rawmaterial cost pressure in 3Q FY11 due to the lagging effect of raw-material
consumption. We expect raw-material cost benefits to come in 4Q FY11.
Valuation
• We maintain our  1 (Buy) rating on the stock and six-month target price of
Rs748, based on an FY12 EV/EBITDA multiple of 5.0x. The stock is trading
currently at an EV/EBITDA multiple of 4.5x on our FY12 EBITDA forecast.
Catalysts and action
• The key catalyst would be timely completion of the India expansion project. We
see the key risk as the inability to pass on increasing input costs.