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Tata Steel FPO: Subscribe
We like Tata Steel for its buoyant business outlook, driven by a) higher sales volume in
FY2013E on completion of its 2.9mn tonne brownfield expansion project in Jamshedpur,
b) raw-material projects at Mozambique and Canada and c) cost-reduction initiatives at Tata
Steel Europe (TSE). We believe Tata Steel’s FPO offers a good entry point to investors even at
the upper price band of `610. Thus, we recommend Subscribe to the issue and reiterate our
Buy recommendation on Tata Steel.
Brownfield expansion coming in the high-margin space: Tata Steel’s Indian operations, the
key earnings driver, are expanding capacity by 2.9mn tonnes in Jamshedpur through
brownfield expansion. The project is expected to be commissioned by the end of FY2012E.
The total project cost is estimated at `16,372cr, of which `6,740cr has already been spent.
From FY2013E, we believe the payoff from the project will be in the form of higher volumes
coupled with lower cost, which will lead to significant earnings accretion.
Raw-material integration set to increase at TSE: Tata Steel is in the process of developing a
coking coal mine in Mozambique and an iron ore mine in Canada to enhance TSE’s
raw-material integration levels. The projects are expected to be commissioned by October
2011 with offtake in smaller quantity, while the full benefit is expected to accrue in FY2013E.
Cost-reduction initiatives at TSE: Tata Steel has undertaken various cost-reduction initiatives
and restructuring measures at TSE, which would lead to savings of US $375mn annually.
Management expects the current normalised EBITDA/tonne of US $50 to increase to US $80
on the back of these initiatives and the completion of mining projects in the next 2–3 years.
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