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Tata Steel – FPO
Angel Broking recommends a Subscribe on Tata Steel FPO.
Tata Steel
Offering a good entry point
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,
where it trades at 5.9x FY2011E and 5.1x FY2012E EV/EBITDA. Thus,
we recommend Subscribe to the issue and reiterate our Buy recommendation on
Tata Steel with a Target Price of `766.
Brownfield expansion coming in the high-margin space: Tata Steel India, the key
earnings driver, is 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, the proportion of sales volume from India,
which is a high-margin centre, is expected to increase substantially, thereby
leading 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 lower offtake initially; the full benefit is
expected to accrue in FY2013E.
Cost reduction initiative 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.
Follow-on public offer details
Tata Steel is coming out with a follow-on public offer (FPO) for `3,386cr–3,477cr
through fresh issue of 5.7cr shares (5.9% of its post-issue paid-up capital) in the
price band of `594–610/share. Post the issue, the promoter holding is expected to
fall to 30.5% of the total share capital as compared to pre-issue holding of 32.5%.
Key analyst meet takeaways
Ongoing Jamshedpur expansion
Management indicated that the blast furnace and the pellet plant are expected
to be commissioned by end of August 2011. However, the plant is expected to
be fully operational by February 2012.
Management also mentioned that total equity investment in the project is
expected to be 9,000cr–10,000cr and the balance amount will be financed
through debt.
Orissa project: The next focus
On completion of the Jamshedpur project, the company intends to pursue the
Orissa project, with a total capacity of 6mn tonnes, in two phases. Phase 1 will
constitute 3mn tonnes of flat capacity and is expected to be completed by
FY2015.
Other expansions in the pipeline are the Chhattisgarh project (5mn tonnes)
and the Karnataka project (3mn tonnes).
Capex allocation
The company plans to spend US $2.0bn–2.2bn in the next two years, of which
US $1.2bn will be invested for expanding capacity in India, US $600mn will
be invested in Europe and US $300mn–400mn will be invested in mining
projects in Canada and Mozambique.
In Europe, the company has planned total capex of £400mn, of which
£200mn will be sustainable capex. The balance £200mn will be spent on
productivity improvement, product development and R&D projects; of this,
rebuilding of Port Talbot will involve a capex of £180mn. Management
expects the current normalised EBITDA/tonne of US $50 to increase to US $80
on completion of all projects at TSE in the next 2–3 years.
Update on Teesside Cast Products
Management indicated that the TCP plant sale to Sahaviriya Steel is expected
to close by March 2011.
Further, the company has received a partial final award in TSE’s favour in an
ongoing arbitration proceeding between TSE and certain off-takers of its
Teesside Cast Products plant on January 5, 2011. The arbitral tribunal held
under the ICC International Court of Arbitration found that the off-takers did
not validly terminate their off-take agreements. According to the company,
arbitration proceedings will now move to the next phase of determining the
amount of damages.
Near-term outlook
Tata Steel has recently increased product prices by £40–50/tonne in Europe.
Management has indicated that steel inventory levels in Europe are not too
high. While the German auto sector has seen an improvement in demand on
the back of improved GDP growth, the construction sector in Europe continues
to remain weak.
Tata Steel sources 40% of its coal requirement from Australia. Management
has indicated that it does not foresee supply issues in the near term as it has
inventory for three months; however, the company will be severely affected if
the situation continues for long.
3QFY2011 performance
Indian operation
Saleable steel production stood at 1.75mn tonnes in 3QFY2011, while
deliveries stood at 1.64mn tonnes, up 3% yoy and flat sequentially.
The company indicated that the pricing environment in 3QFY2011 was mixed
as flat product prices were marginally lower qoq; however, long product prices
witnessed an uptick.
TSE
In 3QFY2011, TSE’s production stood at 3.7mn tonnes, but deliveries declined
by 8% yoy to 3.5mn tonnes but remained flat qoq on account of lower
demand. Further, the company’s operating performance was negatively
impacted by higher raw-material prices.
Southeast Asia
Tata Steel’s Southeast Asian production stood at 721kt in 3QFY2011;
however, sales volume came in lower at 776kt, down 14% yoy and 2% qoq.
Operations were marginally affected by rising scrap prices and a delay in
increasing the prices of finished products.
Outlook and valuation
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, where
it trades at 5.9x FY2011E and 5.1x FY2012E EV/EBITDA. Thus, we recommend
Subscribe to the issue and reiterate our Buy recommendation on Tata Steel with a
Target Price of `766.
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