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UBS Investment Research
Tata Steel Ltd.
Positive developments continue
Tata Steel board approves 57m ordinary share issuance
At the current price of Rs637 share, the issue size would be about US$807m.
While this will lead to c6% dilution, we view it as a positive step as it will help the
company to deleverage. Tata Steel has net debt of about US$10bn and a debt-toequity
ratio of 1.6x, which the issuance should reduce to 1.3x. We consider this
another positive development. In the past four months there have been a series of
positive developments for the company: 1) the direct ore project in Canada; 2)
interest by global majors in Riversdale; and 3) the potential sale of the Teesside
plant in UK.
2011 Jamshedpur expansion should support share price outperformance
We think the Indian operations’ profitability will significantly improve in FY13
with commissioning of the additional 2.9mt capacity by end-2011. We estimate
Corus EBITDA/t to be US$57/50/65 in FY11/12/13 and EBITDA margin in Indian
operations to be 34%/34%/34%. We assume capex of US$2bn per year in FY11-
13.
We change our FY11/12/13 EPS estimates from Rs42.75/86.82/105.65 to
Rs57.36/60.13/95.27. We raise our FY11 estimate 34% due to better profitability at
Corus and lower our FY12-13 estimates 31%/9%, mainly due to higher raw
material costs at Corus. We increase our standalone FY11/12/13 volume
assumptions 0%/7%/4% and change our realisation assumptions -2%/-3%/+8%.
We change our FY11/12/13 EBITDA estimates +18%/-24%/-3%.
Valuation: we maintain our Buy rating; raise price target to Rs820
We maintain our Buy rating and raise our price target from Rs710 to Rs820. We
value Tata Steel on an SOTP basis, with the Indian business at 7.4x, Europe at 6x,
and others at 6.5x EV/EBITDA on normalised EBITDA (FY12-13E).
We decrease our FY12/13 EBITDA estimates to factor in the cost pressure for
higher coking coal and iron ore prices. While Tata Steel India is fully integrated
for iron ore and 50% integrated for coking coal, Tata Steel Europe is fully
exposed to the global prices of iron and coking coal. Given the cost pressure,
slow demand growth and low capacity utilisation of steel plants across Europe,
we believe that price raises will only partially offset the increase in raw material
costs.
We expect the profitability of Indian operations to improve significantly in
FY13 as the company benefits from capacity expansion. Jamshedpur’s capacity
is scheduled to increase by 2.9mt to 9.7mt by December 2011.
We assume a margin decline for Corus in FY12 on higher costs. However, we
estimate that margins will expand in FY13 as the company benefits from captive
iron ore and coking coal.
We estimate Corus will receive 3mt of iron ore from the Canadian iron ore JV in
FY13 and 1mt of coking coal from Benga (Riversdale). We estimate the landed
cost of coking coal will be US$95/t.
We maintain our Buy rating and raise our price target to Rs820. We value Tata
Steel on an SOTP basis with the Indian business at 7.4x, Europe at 6x, and
others at 6.5x EV/EBITDA on normalised EBITDA (FY12-13E).
We highlight the potential upside to our valuation from the potential sale of its
stake in Riversdale Mining. We estimate the sale of the 24% stake to Rio Tinto
would result in additional Rs46/share. However, our current valuation does not
assume the sale of Riversdale stake.
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