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Tata Steel Ltd Overweight
TISC.BO, TATA IN
India earnings above estimates; Corus reports positive
EBITDA/MT in a tough quarter; Stock weakness on
PAT miss a buying opportunity
• 3Q Consol EBITDA ahead of estimates on India, carbon credit sales, but
net profit below estimates on negative other income (charge from fire at
Ijmuiden), higher interest costs: TATA reported 3Q FY11 consol EBITDA at
Rs34.2B (+16% y/y, -7%q/q) v/s JPMe of Rs32.8B and BBRG consensus of
Rs31.4B with the beat driven by India operations (3Q EBITDA at Rs28.2B vs
JPMe of Rs27B) and higher ‘other operating income’ of Rs4.8B (company
indicated carbon credit sales of Rs2.5B). However, recurring consol PAT at
Rs9.8B (reported PAT at Rs10.03B because of a write-back of earlier
provision) vs JPMe of Rs11B and BBRG consensus of Rs11.6B was below
estimates. This was driven by a) higher interest expenses (Rs7.4B vs JPMe of
Rs6.7B), and b) lower tax benefit at overseas entities (12% vs JPMe of 20%).
Corus EBITDA/MT stood at $25/MT vs our estimate of $29/MT and ASP of
$1156/MT (flat q/q). Total Corus EBITDA stood at $88MM vs JPMe of
$99MM. India EBITDA/MT stood at $382/MT with India ASP +6% q/q. Net
debt increased $1B q/q to $11.7B driven mainly by a working capital increase
in Europe.
• Updates on Orissa project highlight pick up in progress: TATA indicated
continued progress on the Orissa project, although admittedly it is still at a
preliminary stage. We see the increasing focus as indicative of growing
confidence on TATA’s part. As Corus stabilizes and Jamshedpur free cash
flows pick up next year, the Orissa project spending should pick up.
• Market focus on PAT disappointment should be viewed as a buying
opportunity: While some investors may be disappointed by the miss at the PAT
level, we would highlight the key positive of Corus achieving positive
EBITDA/MT in what arguably was a very tough quarter with the ASP-RM
mismatch against the company in Europe. Q/Q RM/MT increased 14% for the
overseas units while ASP increased only 2% q/q. From here over the next three
quarters, ASP-RM would be in the company’s favor, after which the key catalyst
of the India expansion should crystallize. We remain OW with a March-12 PT
of Rs820. Given that India operations’ profitability has surprised on the upside,
recent steel price increases of $70-80/MT would flow through the bottom line
over the next two quarters, while Corus should benefit from recent price
increases in Europe, although volumes are likely to remain subdued.
Our March-12 PT of Rs820 is based on our sum-of-the-parts valuation
using FY13 estimates. Our valuation multiples are 6.5x for the India
operation, 5x for Asia, and 5x for Europe, while we value TATA’s
Riversdale stake at a 25% discount to Rio’s bid price (works out to
Rs41/share).
Since our buy case is built on the strong cash flow generation from
India ops, the key risk (other than the generic risk of sharp economic
slowdown) is essentially the negation of raw material advantage for
TATA India (100% iron ore and ~55% coking coal, JPMe iron ore cost
at $20/MT). Possible events which could lead to the above, in our view,
include: a) large levy/mining tax in India; b) sharp decline in Chinese
iron ore imports, leading to spot iron ore price fall; and c) sharp
increase in global low cost iron ore supply. The other large risk is any
large deficit in pension funds at Corus and subsequent cash flow
support from TATA.
Results snapshot
TATA reported consolidated 3Q FY11 PAT of Rs9.7B (-30% q/q, +55% y/y) vs
JPMe and consensus estimate of Rs11.6B. Consolidated EBITDA stood at Rs34.2B
(-7% q/q, +16% y/y) vs JPMe of Rs32.8B and BBRG consensus of Rs31.4B.
Standalone 3Q FY11 PAT at Rs15.1B (+5% q/q, +12% y/y) vs JPMe at Rs14.6B and
BBRG consensus of Rs14.4B. Standalone EBITDA stood at Rs28.2B (+7% q/q,
+22% y/y) v/s JPMe of Rs27B and BBRG consensus of Rs28.3B. Corus
EBITDA/MT stood at $25MT vs 2Q EBITDA of $56/MT and JPMe of $29/MT,
while India operations EBITDA/MT stood at $382/MT v/s 2Q FY11 EBITDA of
$352/MT and JPMe of $365/MT
India operations report strong earnings
While volume growth was subdued in 3Q, ASP increased by ~Rs2K/MT (+6% q/q)
driven by an improved product mix. India EBITDA/MT stood at $382/MT, and we
expect this to increase further over the March-June quarters, as the benefit of the
$70-80/MT spot steel price increase flows through the P&L.
Corus - Scrapes through in a very tough quarter, better times ahead
Corus reported EBITDA of $88MM and EBITDA/MT of $25/MT. Admittedly, this
was helped by the presence of carbon credits (as the utilization levels remains low).
We view positive EBITDA/MT at Corus as a validation of TATA re-structuring
efforts, given that ASP-RM mismatch was against the company (RM +14% q/q,
while ASP +2% only in the subsidiaries). We expect Corus to report improved
earnings over the next three quarters as the mismatch returns in the company’s favor.
Valuations, key risks
We value TATA’s Riversdale stake at a 25% discount to Rio’s bid price (works out
to Rs41/share). Our March-12 PT of Rs820 is based on our sum-of-the-parts
valuation using FY13 estimates. Since our buy case is built on the strong cash flow
generation from India ops, the key risk (other than the generic risk of sharp economic
slowdown) is essentially the negation of raw material advantage for TATA India
(100% iron ore and ~55% coking coal, JPMe iron ore cost at $20/MT). Possible events which could lead to the above, in our view, include a: a) large levy/mining tax
in India; b) sharp decline in Chinese iron ore imports, leading to spot iron ore price
fall and c) sharp increase in global low cost iron ore supply. The other large risk is
any large deficit in pension funds at Corus and subsequent cash flow support from
TATA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Ltd Overweight
TISC.BO, TATA IN
India earnings above estimates; Corus reports positive
EBITDA/MT in a tough quarter; Stock weakness on
PAT miss a buying opportunity
• 3Q Consol EBITDA ahead of estimates on India, carbon credit sales, but
net profit below estimates on negative other income (charge from fire at
Ijmuiden), higher interest costs: TATA reported 3Q FY11 consol EBITDA at
Rs34.2B (+16% y/y, -7%q/q) v/s JPMe of Rs32.8B and BBRG consensus of
Rs31.4B with the beat driven by India operations (3Q EBITDA at Rs28.2B vs
JPMe of Rs27B) and higher ‘other operating income’ of Rs4.8B (company
indicated carbon credit sales of Rs2.5B). However, recurring consol PAT at
Rs9.8B (reported PAT at Rs10.03B because of a write-back of earlier
provision) vs JPMe of Rs11B and BBRG consensus of Rs11.6B was below
estimates. This was driven by a) higher interest expenses (Rs7.4B vs JPMe of
Rs6.7B), and b) lower tax benefit at overseas entities (12% vs JPMe of 20%).
Corus EBITDA/MT stood at $25/MT vs our estimate of $29/MT and ASP of
$1156/MT (flat q/q). Total Corus EBITDA stood at $88MM vs JPMe of
$99MM. India EBITDA/MT stood at $382/MT with India ASP +6% q/q. Net
debt increased $1B q/q to $11.7B driven mainly by a working capital increase
in Europe.
• Updates on Orissa project highlight pick up in progress: TATA indicated
continued progress on the Orissa project, although admittedly it is still at a
preliminary stage. We see the increasing focus as indicative of growing
confidence on TATA’s part. As Corus stabilizes and Jamshedpur free cash
flows pick up next year, the Orissa project spending should pick up.
• Market focus on PAT disappointment should be viewed as a buying
opportunity: While some investors may be disappointed by the miss at the PAT
level, we would highlight the key positive of Corus achieving positive
EBITDA/MT in what arguably was a very tough quarter with the ASP-RM
mismatch against the company in Europe. Q/Q RM/MT increased 14% for the
overseas units while ASP increased only 2% q/q. From here over the next three
quarters, ASP-RM would be in the company’s favor, after which the key catalyst
of the India expansion should crystallize. We remain OW with a March-12 PT
of Rs820. Given that India operations’ profitability has surprised on the upside,
recent steel price increases of $70-80/MT would flow through the bottom line
over the next two quarters, while Corus should benefit from recent price
increases in Europe, although volumes are likely to remain subdued.
Our March-12 PT of Rs820 is based on our sum-of-the-parts valuation
using FY13 estimates. Our valuation multiples are 6.5x for the India
operation, 5x for Asia, and 5x for Europe, while we value TATA’s
Riversdale stake at a 25% discount to Rio’s bid price (works out to
Rs41/share).
Since our buy case is built on the strong cash flow generation from
India ops, the key risk (other than the generic risk of sharp economic
slowdown) is essentially the negation of raw material advantage for
TATA India (100% iron ore and ~55% coking coal, JPMe iron ore cost
at $20/MT). Possible events which could lead to the above, in our view,
include: a) large levy/mining tax in India; b) sharp decline in Chinese
iron ore imports, leading to spot iron ore price fall; and c) sharp
increase in global low cost iron ore supply. The other large risk is any
large deficit in pension funds at Corus and subsequent cash flow
support from TATA.
Results snapshot
TATA reported consolidated 3Q FY11 PAT of Rs9.7B (-30% q/q, +55% y/y) vs
JPMe and consensus estimate of Rs11.6B. Consolidated EBITDA stood at Rs34.2B
(-7% q/q, +16% y/y) vs JPMe of Rs32.8B and BBRG consensus of Rs31.4B.
Standalone 3Q FY11 PAT at Rs15.1B (+5% q/q, +12% y/y) vs JPMe at Rs14.6B and
BBRG consensus of Rs14.4B. Standalone EBITDA stood at Rs28.2B (+7% q/q,
+22% y/y) v/s JPMe of Rs27B and BBRG consensus of Rs28.3B. Corus
EBITDA/MT stood at $25MT vs 2Q EBITDA of $56/MT and JPMe of $29/MT,
while India operations EBITDA/MT stood at $382/MT v/s 2Q FY11 EBITDA of
$352/MT and JPMe of $365/MT
India operations report strong earnings
While volume growth was subdued in 3Q, ASP increased by ~Rs2K/MT (+6% q/q)
driven by an improved product mix. India EBITDA/MT stood at $382/MT, and we
expect this to increase further over the March-June quarters, as the benefit of the
$70-80/MT spot steel price increase flows through the P&L.
Corus - Scrapes through in a very tough quarter, better times ahead
Corus reported EBITDA of $88MM and EBITDA/MT of $25/MT. Admittedly, this
was helped by the presence of carbon credits (as the utilization levels remains low).
We view positive EBITDA/MT at Corus as a validation of TATA re-structuring
efforts, given that ASP-RM mismatch was against the company (RM +14% q/q,
while ASP +2% only in the subsidiaries). We expect Corus to report improved
earnings over the next three quarters as the mismatch returns in the company’s favor.
Valuations, key risks
We value TATA’s Riversdale stake at a 25% discount to Rio’s bid price (works out
to Rs41/share). Our March-12 PT of Rs820 is based on our sum-of-the-parts
valuation using FY13 estimates. Since our buy case is built on the strong cash flow
generation from India ops, the key risk (other than the generic risk of sharp economic
slowdown) is essentially the negation of raw material advantage for TATA India
(100% iron ore and ~55% coking coal, JPMe iron ore cost at $20/MT). Possible events which could lead to the above, in our view, include a: a) large levy/mining tax
in India; b) sharp decline in Chinese iron ore imports, leading to spot iron ore price
fall and c) sharp increase in global low cost iron ore supply. The other large risk is
any large deficit in pension funds at Corus and subsequent cash flow support from
TATA.
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