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Tata Steel
3Q: Profits decline sharply led by higher costs
„3Q profits decline as expected, Maintain Underperform
Adj. Grp. PAT declined 33%QoQ to Rs9.7bn vs our Rs10.4bn est. Grp. EBITDA
was inline (-9%QoQ) but lower other income led to PAT miss. Corus EBITDA was
inline at US$88mn, but core profits were lower as EBITDA included gains from
carbon credit (CER) sales. India PAT was flat QoQ. We raised FY11E EPS by 7%
& PO to Rs560 due to higher ASP in 4Q, lower interest costs & dilution from FPO.
We expect margins to jump in 4Q as price hikes lead cost hikes, but this should
reverse in FY12 on higher costs. We remain cautious as non integrated Corus
could face potential margin squeeze post 1QFY12 due to higher costs.
Corus EBITDA down 55%QoQ, underlying profits lower
EBITDA/t declined sharply to US$25/t ($56/t in 2Q) as expected. Excluding CER
gains of US$24mn (net of fire losses of US$31mn), core EBITDA/t was lower at
US$18/t. Volumes declined 2%QoQ due to weaker demand during 3Q. ASP was
flat QoQ, but higher input costs (+US$30/t QoQ) led to margin squeeze. Mgmt
expects Corus utilizations to remain around 80% levels over next few quarters.
Domestic EBITDA up 3%QoQ as expected
Standalone PAT was Rs15.1bn, flat QoQ, vs. our Rs15.3bn forecast. Steel
EBITDA/t was US$355/t, (+US$8/t QoQ). ASP was ahead, up 2.3%QoQ led by
higher long prices and better product mix, but this was offset by higher input costs
(+10%QoQ) due to higher coking coal costs. Volumes grew 2%QoQ to 1.64mt.
Key takeaways from analyst call
1) 2.9mtpa expansion to be completed in 2HFY12; 2) Coal cost hikes are likely to
kick in with a lag due to carry forward inventory (~80days at Corus); 3)
Environmental approval for Canada iron ore project has been obtained. Mgmt
expects production to commence in 1QFY13; 4) Net debt has increased to
US$11.8bn as on 3Q (US$10.7bn in 2QFY11). We estimate net gearing is ~1.6x.
Price objective basis & risk
Tata Steel (TAELF)
Our PO of Rs560 is based on our NPV valuation. Our NPV assumes a WACC of
12.5% and perpetuity growth rate of 0%. Upside risks to our valuation are higher
steel prices and volumes, lower input costs, and higher domestic import duty.
Downside risks are lower-than-expected steel prices, volumes, delays in
commissioning of new expansion and sharper than expected increase in costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel
3Q: Profits decline sharply led by higher costs
„3Q profits decline as expected, Maintain Underperform
Adj. Grp. PAT declined 33%QoQ to Rs9.7bn vs our Rs10.4bn est. Grp. EBITDA
was inline (-9%QoQ) but lower other income led to PAT miss. Corus EBITDA was
inline at US$88mn, but core profits were lower as EBITDA included gains from
carbon credit (CER) sales. India PAT was flat QoQ. We raised FY11E EPS by 7%
& PO to Rs560 due to higher ASP in 4Q, lower interest costs & dilution from FPO.
We expect margins to jump in 4Q as price hikes lead cost hikes, but this should
reverse in FY12 on higher costs. We remain cautious as non integrated Corus
could face potential margin squeeze post 1QFY12 due to higher costs.
Corus EBITDA down 55%QoQ, underlying profits lower
EBITDA/t declined sharply to US$25/t ($56/t in 2Q) as expected. Excluding CER
gains of US$24mn (net of fire losses of US$31mn), core EBITDA/t was lower at
US$18/t. Volumes declined 2%QoQ due to weaker demand during 3Q. ASP was
flat QoQ, but higher input costs (+US$30/t QoQ) led to margin squeeze. Mgmt
expects Corus utilizations to remain around 80% levels over next few quarters.
Domestic EBITDA up 3%QoQ as expected
Standalone PAT was Rs15.1bn, flat QoQ, vs. our Rs15.3bn forecast. Steel
EBITDA/t was US$355/t, (+US$8/t QoQ). ASP was ahead, up 2.3%QoQ led by
higher long prices and better product mix, but this was offset by higher input costs
(+10%QoQ) due to higher coking coal costs. Volumes grew 2%QoQ to 1.64mt.
Key takeaways from analyst call
1) 2.9mtpa expansion to be completed in 2HFY12; 2) Coal cost hikes are likely to
kick in with a lag due to carry forward inventory (~80days at Corus); 3)
Environmental approval for Canada iron ore project has been obtained. Mgmt
expects production to commence in 1QFY13; 4) Net debt has increased to
US$11.8bn as on 3Q (US$10.7bn in 2QFY11). We estimate net gearing is ~1.6x.
Price objective basis & risk
Tata Steel (TAELF)
Our PO of Rs560 is based on our NPV valuation. Our NPV assumes a WACC of
12.5% and perpetuity growth rate of 0%. Upside risks to our valuation are higher
steel prices and volumes, lower input costs, and higher domestic import duty.
Downside risks are lower-than-expected steel prices, volumes, delays in
commissioning of new expansion and sharper than expected increase in costs.
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