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TATA STEEL: BUY, TP-Rs817 (32% upside)
What’s the theme?
We expect Tata Steel's EBITDA to grow at 42% CAGR over FY10-12, driven by its increasing share of
profitable Indian operations with additional capacity at Jamshedpur, turnaround at Tata Steel Europe
(TSE), capital restructuring, leaner cost structure, partial resource integration, and improving steel
profitability. We expect Tata Steel's consolidated net profit to be Rs60.7bn in FY11 and Rs64.0bn in FY12.
We find the stock attractively valued at 4.8x FY12E EV/EBITDA.
What will move the stock?
1) Brownfield expansion of 2.9mn tonnes at Jamshedpur to increase share of profitable Indian operations
(FY11E EBITDA/t of USD382 vs. consolidated USD141); 2) FPO proceeds of Rs34.8bn eased high financial
leverage (1.2x pre-issue vs. 1.0x post-issue); 3) Further fund raising of USD500mn via perpetual bond for
long-term capex plans and debt repayment; 4) Recovery in European steel market apparent in better
performance of Arcelor Mittal in Q4CY10 and stronger outlook for CY11; 5) Progress on raw material
integration in TSE; and 6) Maintenance of its 24.2% stake in Riversdale Mining for which Rio Tinto announced
a bid for takeover.
Where are we stacked versus consensus?
Our consolidated estimates are slightly on the lower side as compared to the street. We value Tata Steel
using SOTP methodology at Rs817.
What will challenge our target price?
1) Lower steel profitability on correction in steel prices and/or significant rise in input costs; 2) Weak
recovery in Europe leading to lower capacity utilization and sustained subdued profitability at TSE;
3) Delay in Brownfield expansion; and 4) Delay in resource integration.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TATA STEEL: BUY, TP-Rs817 (32% upside)
What’s the theme?
We expect Tata Steel's EBITDA to grow at 42% CAGR over FY10-12, driven by its increasing share of
profitable Indian operations with additional capacity at Jamshedpur, turnaround at Tata Steel Europe
(TSE), capital restructuring, leaner cost structure, partial resource integration, and improving steel
profitability. We expect Tata Steel's consolidated net profit to be Rs60.7bn in FY11 and Rs64.0bn in FY12.
We find the stock attractively valued at 4.8x FY12E EV/EBITDA.
What will move the stock?
1) Brownfield expansion of 2.9mn tonnes at Jamshedpur to increase share of profitable Indian operations
(FY11E EBITDA/t of USD382 vs. consolidated USD141); 2) FPO proceeds of Rs34.8bn eased high financial
leverage (1.2x pre-issue vs. 1.0x post-issue); 3) Further fund raising of USD500mn via perpetual bond for
long-term capex plans and debt repayment; 4) Recovery in European steel market apparent in better
performance of Arcelor Mittal in Q4CY10 and stronger outlook for CY11; 5) Progress on raw material
integration in TSE; and 6) Maintenance of its 24.2% stake in Riversdale Mining for which Rio Tinto announced
a bid for takeover.
Where are we stacked versus consensus?
Our consolidated estimates are slightly on the lower side as compared to the street. We value Tata Steel
using SOTP methodology at Rs817.
What will challenge our target price?
1) Lower steel profitability on correction in steel prices and/or significant rise in input costs; 2) Weak
recovery in Europe leading to lower capacity utilization and sustained subdued profitability at TSE;
3) Delay in Brownfield expansion; and 4) Delay in resource integration.
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