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Tata Steel- Sustainable march expected ahead…
Tata Steel’s Q3FY11 results were much better than its peers due to the
sustainability at Tata Steel, Europe in the past few quarters and robust
performance of Indian operations. Topline growth (up ~11% YoY and
~3% QoQ) was aided by stable volumes and improved blended
realisations across all geographies. It came better than our estimates at
| 29089 crore against expected | 26886 crore. EBITDA also jumped ~
16% YoY but fell ~6% QoQ mainly due to rising iron ore and coking
coal prices. PAT dropped considerably, down ~112% YoY and ~49%
QoQ due to drop in other income component by ~| 102 crore and also
rising interest cost (up 12% QoQ). Blended EBITDA/tonne at Tata Steel,
Europe, however, came down to $25 for Q3FY11 against $50 in Q2FY11
partially led by lack of raw material integration playing spoilsport due
to higher iron ore and coking coal prices. However, going forward, we
would like to maintain a cautious stance. This is despite a sustained
performance at Tata Steel Europe due to higher raw material prices and
lack of incremental demand from the European arm that is likely to
make a dent on its performance. We have revised upwards our target
price to | 700/share and assigned an ADD rating to the stock.
Stable volumes, improved realisation across all geographies
The operational performance remained firm viz. Indian operations
supporting the cause (at 1.64 million tonnes [MT] in Q3FY11 vs. 1.66
MT in Q2FY11 and 1.68 MT in Q3FY10), Europe (average realisations
at $1155/tonne in Q3FY11 against $1158/tonne in Q2FY11 and
$958/tonne in Q3FY10) and Asian operations also posting relatively
better numbers.
Valuation
At the CMP of | 655, the stock is discounting its FY12E EPS by 7.6x and
FY12E EV/EBITDA by 5.1x. We have revised our target price to | 700,
valuing the Indian operations at 6x its FY12E EV/EBITDA and European
and Asian subsidiaries at 4x its FY12E EV/EBITDA. We have assigned an
ADD rating to the stock.
Q3FY11 Result Analysis
Group consolidated turnover at | 28,606 crore (US$6.4 billion) in Q3FY11
improved marginally by 2%, compared to Q2FY11 on the back of higher
realisations in India and Europe. Volumes in Europe were lower due to
weak demand during the quarter on account of the festive season.
Domestically, sales volumes remained muted at 1.64 MT. Q3FY11 sales
from South East Asian operation were lower by 7.5% as compared to
Q2FY11. This was mainly on account of disappointing numbers from
Thailand operations.
Group EBITDA in Q3FY11 was at | 3424 crore (US$766 million), lower
than that recorded in Q2FY11 despite a robust performance from India
operations. Higher raw material costs in Europe and loss made at its
South East Asian subsidiaries dented the overall operating performance
of the group.
The group’s PAT for Q3FY11 at | 949 crore (US$212 million) was ~ 51%
lower sequentially on the back of higher depreciation and interest cost.
However, YoY the PAT improved by 195% as compared to | 432 crore
(US$104 million).
Product price Trend
In the past two months, the price of basic steel has risen 33%, after big
rises in iron ore and coking coal. Chinese companies have also raised
prices to support surge in HR and CR prices globally.
After major hikes by Russian and Ukrainian steel mills in their offer prices
for HR and CR by US$50 per tonne to US$70 per tonne, Chinese mills
have followed the same path by increasing their offers by about US$50
per tonne.
The reaction from buyers to hiked levels is yet to emerge but it is clear
that these moves would keep global flat product prices on upward trend.
Outlook & Earnings Revision
Indian operations continued to maintain the run rate with improvement in
volumes and realisations aided by growing strength in industrial activity
and intensifying demand from the infrastructure, construction and auto
sectors. The 3 MT brownfield capacity expansions at Jamshedpur are on
track and are likely to be commissioned in the latter part of FY12. With
better raw material integration, the company should maintain the
earnings traction, going ahead. While Tata Steel, India has benefited from
higher steel prices and captive iron ore, the efficiency of its operations as
well as its rich product mix has contributed to the profitability. Indian
crude steel production rose more than 6% in 2010 but the country
remained a net importer of steel, demonstrating the market potential for
Indian steelmakers.
Tata Steel Europe has also seen a significant turnaround in the past three
quarters and has finally sustained its performance over the last nine
months. However, the EBITDA/tonne dropped QoQ to ~$25/tonne in
Q3FY11 vs. $50/tonne in Q2FY11 due to higher coking coal and iron ore
prices and lack of raw material integration. This led to cost-based push,
thus denting the otherwise good numbers. We continue to maintain a
cautious stance due to the expected drop in capacity utilisation levels and
higher raw material prices continuing to compress margins at Tata Steel,
Europe for the next few quarters.
The South East Asian operations are expected to maintain the stable
performance seen in Q3FY11 due to strong demand from the
construction sector in China, Australia and Vietnam where NatSteel
operates. Also, the Thai government has approved the increased budget
for public sector construction. Private investment in Thailand is projected
to grow at a high rate, supported by high capacity utilisation and growth
in export–oriented industries such as motor vehicles, electronic parts and
electrical appliances. Tata Steel, Thailand will continue its focus on
developing its rebar customer base in Laos, Myanmar and Cambodia and
on increasing sales of rebar and high-grade wire rods to existing and new
customers in Vietnam, Indonesia and South Korea.
We continue to maintain a cautious stance despite stellar results due to
the slowdown in Europe affecting the capacity utilisation ratios and lack of
raw material integration leading to further pressure on margins. We have
revised our estimates for FY11E and FY12E based on the above concerns.
Valuation
At the CMP of | 655, the stock is discounting its FY12E EPS by 7.6x and
FY12E EV/EBITDA by 5.1x. We have revised our target price to | 700,
valuing the Indian operations at 6x its FY12E EV/EBITDA and European
and Asian subsidiaries at 4x its FY12E EV/EBITDA. We have assigned an
ADD rating to the stock.
Other Updates
Tata Steel Ltd has entered into a joint venture agreement with Nippon
Steel to set up India’s first continuous annealing and processing line
(CAPL) for the production of 6,00,000 tonnes per annum of automotive
cold rolled steel at Jamshedpur. TSL will hold 51% and NSC 49% of the
equity capital of the joint venture company. The capex for the same will
be ~ | 2,300 crore and is expected to come on stream in 2013.
Tata Steel had entered into exclusive rights to negotiate an arrangement
with New Millennium Corp Ltd to develop two of its iron ore projects,
LabMag (with reserves of 3.5 billion tonnes) and KéMag (with 2.1 billion
tonnes). Tata Steel and NML are negotiating definitive agreements for the
development of the projects and are expected to enter into these
agreements by February 28, 2010, subject to approval from TSL’s board.
NML has received environmental approval for Phase 1 of its joint venture
direct shipping ore project with Tata Steel. The iron ore production will
start by the second quarter of CY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel- Sustainable march expected ahead…
Tata Steel’s Q3FY11 results were much better than its peers due to the
sustainability at Tata Steel, Europe in the past few quarters and robust
performance of Indian operations. Topline growth (up ~11% YoY and
~3% QoQ) was aided by stable volumes and improved blended
realisations across all geographies. It came better than our estimates at
| 29089 crore against expected | 26886 crore. EBITDA also jumped ~
16% YoY but fell ~6% QoQ mainly due to rising iron ore and coking
coal prices. PAT dropped considerably, down ~112% YoY and ~49%
QoQ due to drop in other income component by ~| 102 crore and also
rising interest cost (up 12% QoQ). Blended EBITDA/tonne at Tata Steel,
Europe, however, came down to $25 for Q3FY11 against $50 in Q2FY11
partially led by lack of raw material integration playing spoilsport due
to higher iron ore and coking coal prices. However, going forward, we
would like to maintain a cautious stance. This is despite a sustained
performance at Tata Steel Europe due to higher raw material prices and
lack of incremental demand from the European arm that is likely to
make a dent on its performance. We have revised upwards our target
price to | 700/share and assigned an ADD rating to the stock.
Stable volumes, improved realisation across all geographies
The operational performance remained firm viz. Indian operations
supporting the cause (at 1.64 million tonnes [MT] in Q3FY11 vs. 1.66
MT in Q2FY11 and 1.68 MT in Q3FY10), Europe (average realisations
at $1155/tonne in Q3FY11 against $1158/tonne in Q2FY11 and
$958/tonne in Q3FY10) and Asian operations also posting relatively
better numbers.
Valuation
At the CMP of | 655, the stock is discounting its FY12E EPS by 7.6x and
FY12E EV/EBITDA by 5.1x. We have revised our target price to | 700,
valuing the Indian operations at 6x its FY12E EV/EBITDA and European
and Asian subsidiaries at 4x its FY12E EV/EBITDA. We have assigned an
ADD rating to the stock.
Q3FY11 Result Analysis
Group consolidated turnover at | 28,606 crore (US$6.4 billion) in Q3FY11
improved marginally by 2%, compared to Q2FY11 on the back of higher
realisations in India and Europe. Volumes in Europe were lower due to
weak demand during the quarter on account of the festive season.
Domestically, sales volumes remained muted at 1.64 MT. Q3FY11 sales
from South East Asian operation were lower by 7.5% as compared to
Q2FY11. This was mainly on account of disappointing numbers from
Thailand operations.
Group EBITDA in Q3FY11 was at | 3424 crore (US$766 million), lower
than that recorded in Q2FY11 despite a robust performance from India
operations. Higher raw material costs in Europe and loss made at its
South East Asian subsidiaries dented the overall operating performance
of the group.
The group’s PAT for Q3FY11 at | 949 crore (US$212 million) was ~ 51%
lower sequentially on the back of higher depreciation and interest cost.
However, YoY the PAT improved by 195% as compared to | 432 crore
(US$104 million).
Product price Trend
In the past two months, the price of basic steel has risen 33%, after big
rises in iron ore and coking coal. Chinese companies have also raised
prices to support surge in HR and CR prices globally.
After major hikes by Russian and Ukrainian steel mills in their offer prices
for HR and CR by US$50 per tonne to US$70 per tonne, Chinese mills
have followed the same path by increasing their offers by about US$50
per tonne.
The reaction from buyers to hiked levels is yet to emerge but it is clear
that these moves would keep global flat product prices on upward trend.
Outlook & Earnings Revision
Indian operations continued to maintain the run rate with improvement in
volumes and realisations aided by growing strength in industrial activity
and intensifying demand from the infrastructure, construction and auto
sectors. The 3 MT brownfield capacity expansions at Jamshedpur are on
track and are likely to be commissioned in the latter part of FY12. With
better raw material integration, the company should maintain the
earnings traction, going ahead. While Tata Steel, India has benefited from
higher steel prices and captive iron ore, the efficiency of its operations as
well as its rich product mix has contributed to the profitability. Indian
crude steel production rose more than 6% in 2010 but the country
remained a net importer of steel, demonstrating the market potential for
Indian steelmakers.
Tata Steel Europe has also seen a significant turnaround in the past three
quarters and has finally sustained its performance over the last nine
months. However, the EBITDA/tonne dropped QoQ to ~$25/tonne in
Q3FY11 vs. $50/tonne in Q2FY11 due to higher coking coal and iron ore
prices and lack of raw material integration. This led to cost-based push,
thus denting the otherwise good numbers. We continue to maintain a
cautious stance due to the expected drop in capacity utilisation levels and
higher raw material prices continuing to compress margins at Tata Steel,
Europe for the next few quarters.
The South East Asian operations are expected to maintain the stable
performance seen in Q3FY11 due to strong demand from the
construction sector in China, Australia and Vietnam where NatSteel
operates. Also, the Thai government has approved the increased budget
for public sector construction. Private investment in Thailand is projected
to grow at a high rate, supported by high capacity utilisation and growth
in export–oriented industries such as motor vehicles, electronic parts and
electrical appliances. Tata Steel, Thailand will continue its focus on
developing its rebar customer base in Laos, Myanmar and Cambodia and
on increasing sales of rebar and high-grade wire rods to existing and new
customers in Vietnam, Indonesia and South Korea.
We continue to maintain a cautious stance despite stellar results due to
the slowdown in Europe affecting the capacity utilisation ratios and lack of
raw material integration leading to further pressure on margins. We have
revised our estimates for FY11E and FY12E based on the above concerns.
Valuation
At the CMP of | 655, the stock is discounting its FY12E EPS by 7.6x and
FY12E EV/EBITDA by 5.1x. We have revised our target price to | 700,
valuing the Indian operations at 6x its FY12E EV/EBITDA and European
and Asian subsidiaries at 4x its FY12E EV/EBITDA. We have assigned an
ADD rating to the stock.
Other Updates
Tata Steel Ltd has entered into a joint venture agreement with Nippon
Steel to set up India’s first continuous annealing and processing line
(CAPL) for the production of 6,00,000 tonnes per annum of automotive
cold rolled steel at Jamshedpur. TSL will hold 51% and NSC 49% of the
equity capital of the joint venture company. The capex for the same will
be ~ | 2,300 crore and is expected to come on stream in 2013.
Tata Steel had entered into exclusive rights to negotiate an arrangement
with New Millennium Corp Ltd to develop two of its iron ore projects,
LabMag (with reserves of 3.5 billion tonnes) and KéMag (with 2.1 billion
tonnes). Tata Steel and NML are negotiating definitive agreements for the
development of the projects and are expected to enter into these
agreements by February 28, 2010, subject to approval from TSL’s board.
NML has received environmental approval for Phase 1 of its joint venture
direct shipping ore project with Tata Steel. The iron ore production will
start by the second quarter of CY12.
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