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Robust India performance; EBITDA higher than estimate
Tata Steel’s India operations reported net sales of ~INR 74 bn for Q3FY11, up
4.1% Q-o-Q and 17.3% Y-o-Y, and were also 4.5% higher than our estimate,
primarily on account of higher realizations. Average realizations stood at
INR 45.2k/t against our assumption of INR 43.3k/t. The impact of higher sales
was witnessed at the EBITDA level, with EBITDA rising 7.3% Q-o-Q (4.7% more
than our assumption) and EBITDA/t at USD 384 against our assumption of
USD 367. Net profit declined 26.7% Q-o-Q largely on account of lower other
income with no profit on sale of investments in the current quarter; it was 3.6%
higher than our estimate.
Corus’ EBITDA/t of USD 25 marginally below estimate
European operations reported sales volume of 3.5 mt in Q3FY11 and EBITDA/t of
USD 25 (lower than our estimate of USD 29). In Q4FY11, we expect EBITDA/t to
rise substantially as steel prices have risen by ~USD 100/t, whereas raw
material cost push is ~USD 40-45/t. South-East Asian operations disappointed
with an EBITDA loss of USD 3 mn.
Negative other income leads to disappointment at PAT level
Due to an asset write-down of GBP 20 mn resulting from fire at its Netherlands
operations, the company recorded negative other income. On back of higher
interest, PAT came in lower at INR 10.0 bn against our estimate of INR 12.6 bn.
Outlook and valuations: Remain positive; maintain ‘BUY’
We maintain our view of expansion in steel margins by USD 30-35/t (nonintegrated)
in FY12E from Q3FY11 levels in spite of cost headwinds. The
company has launched its 3 mtpa Orissa project, which is a long-term positive.
We expect earnings growth from the upcoming 2.9 mtpa Jamshedpur facility in
FY13, valuation benefits from the international raw material projects, and betterthan-
expected performance of European operations. We maintain ‘BUY/Sector
performer’ recommendation/rating with a price target of INR 778/share based
on FY12 estimates. We retain our FY11 and FY12 estimates and introduce FY13
estimates. For FY13, we assume volumes of 2.2 mt from the 2.9 mt expansion
project and EBITDA/t of USD 348/t in India due to excess capacity concerns.
Key highlights of Q3FY11 results/ earnings call
European operations
• Capacity utilization has dipped to 70-75% in Q3FY11 versus ~87% in Q2FY11 and
~90% in Q1FY11. The dip was primarily on account of a seasonally weak quarter in
Europe and is expected to rise in Q4FY11. Company is targeting 75-80% level.
• Average realizations remained flat Q-o-Q at USD 1,156/t. Y-o-Y, they rose 22%.
• The company benefitted by carbon credit sale of GBP 35 mn in Q3FY11 against GBP
60 mn in Q2FY11 which is included in other operational income. For Q3FY11, this
amounts to USD 15/t. The carbon credit sale is expected to be at this level going
forward.
• A negative other income (charge) was realized in international (Corus) operations on
account of an impairment of asset impacted due to fire at IJmuidden.
• There was also a reversal of restructuring charges on account of excess provisioning
for release of TCP. The same was ~GBP 17 mn.
• European operations currently have ~65 days of coking coal inventory compared to
a normal run rate of 45-50 days.
• Net loss in European operations was USD 120 mn.
• Finished steel inventory at European operations is ~60-65 days in terms of number
of days.
• Long-term contracts now include escalation clauses to mitigate the effect of volatile
raw material prices.
India operations
• India operations reported blended realization of INR 45.2k/t, a 5.5% Q-o-Q rise
against our assumption of 1% increase.
• EBITDA/t stood at INR 17.2k, 8.8% rise Q-o-Q and 31.6% Y-o-Y. At USD 384/t with
further rise expected going forward, our FY12 estimate of USD 375/t looks
achievable.
Other key points
• The Jamshedpur expansion of 2.9 mtpa will receive funding of INR ~18.8 bn through
the FPO proceeds of INR 35 bn. The balance will be utilized towards debt repayment
and other corporate purposes.
• On Y-o-Y comparison, debt has increased by ~USD 1.3 bn to USD 13.1 bn. Of the
increase, ~USD 250 mn is due to exchange fluctuation, ~USD 600 mn is in Corus
largely due to increased working capital, and ~USD 300 mn is for the Jamshedpur
expansion.
• The JV with Nippon Steel for 0.6 mtpa auto steel rolling plant has been finalized and
the plant is expected to be completed by 2013.
• Iron ore projects in Canada and coking coal in Mozambique are expected to start
operations by Q2CY12.
• The company is targeting net debt:EBITDA and debt:equity ratios of 2.5-2.7x and
1.0-1.2x, respectively.
Company Description
Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s second largest
private sector steel company. With the take over of Corus Steel (Europe’s second largest
steel producer), Tata Steel is now the sixth largest steel company in the world with over
31mtpa of steel capacity. Tata Steel’s Indian operations are amongst the lowest
producers of steel in the world comprising 6.8 mtpa steel making facility at Jamshedpur
in Jharkhand.
Investment Theme
We believe the worst is behind us for the global steel sector. Steel prices have started
increasing starting with China & India followed by hikes in USA and Europe. While low
capacity utilization will prevent outsized price rallies, we believe prices will move above
marginal cost. Demand is picking up slowly and we expect reasonable recovery in
European steel starting from Q2FY10 and going into FY11E. Tata Steel has already taken
steps for cost reduction and hits on the P&L for such restructuring. Led by all this, we
expect strong earnings growth in FY11E.
Key Risks
• Any delay in demand revival and/or renewed slump in European steel.
• Higher than anticipated Chinese/CIS steel exports into Europe.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Robust India performance; EBITDA higher than estimate
Tata Steel’s India operations reported net sales of ~INR 74 bn for Q3FY11, up
4.1% Q-o-Q and 17.3% Y-o-Y, and were also 4.5% higher than our estimate,
primarily on account of higher realizations. Average realizations stood at
INR 45.2k/t against our assumption of INR 43.3k/t. The impact of higher sales
was witnessed at the EBITDA level, with EBITDA rising 7.3% Q-o-Q (4.7% more
than our assumption) and EBITDA/t at USD 384 against our assumption of
USD 367. Net profit declined 26.7% Q-o-Q largely on account of lower other
income with no profit on sale of investments in the current quarter; it was 3.6%
higher than our estimate.
Corus’ EBITDA/t of USD 25 marginally below estimate
European operations reported sales volume of 3.5 mt in Q3FY11 and EBITDA/t of
USD 25 (lower than our estimate of USD 29). In Q4FY11, we expect EBITDA/t to
rise substantially as steel prices have risen by ~USD 100/t, whereas raw
material cost push is ~USD 40-45/t. South-East Asian operations disappointed
with an EBITDA loss of USD 3 mn.
Negative other income leads to disappointment at PAT level
Due to an asset write-down of GBP 20 mn resulting from fire at its Netherlands
operations, the company recorded negative other income. On back of higher
interest, PAT came in lower at INR 10.0 bn against our estimate of INR 12.6 bn.
Outlook and valuations: Remain positive; maintain ‘BUY’
We maintain our view of expansion in steel margins by USD 30-35/t (nonintegrated)
in FY12E from Q3FY11 levels in spite of cost headwinds. The
company has launched its 3 mtpa Orissa project, which is a long-term positive.
We expect earnings growth from the upcoming 2.9 mtpa Jamshedpur facility in
FY13, valuation benefits from the international raw material projects, and betterthan-
expected performance of European operations. We maintain ‘BUY/Sector
performer’ recommendation/rating with a price target of INR 778/share based
on FY12 estimates. We retain our FY11 and FY12 estimates and introduce FY13
estimates. For FY13, we assume volumes of 2.2 mt from the 2.9 mt expansion
project and EBITDA/t of USD 348/t in India due to excess capacity concerns.
Key highlights of Q3FY11 results/ earnings call
European operations
• Capacity utilization has dipped to 70-75% in Q3FY11 versus ~87% in Q2FY11 and
~90% in Q1FY11. The dip was primarily on account of a seasonally weak quarter in
Europe and is expected to rise in Q4FY11. Company is targeting 75-80% level.
• Average realizations remained flat Q-o-Q at USD 1,156/t. Y-o-Y, they rose 22%.
• The company benefitted by carbon credit sale of GBP 35 mn in Q3FY11 against GBP
60 mn in Q2FY11 which is included in other operational income. For Q3FY11, this
amounts to USD 15/t. The carbon credit sale is expected to be at this level going
forward.
• A negative other income (charge) was realized in international (Corus) operations on
account of an impairment of asset impacted due to fire at IJmuidden.
• There was also a reversal of restructuring charges on account of excess provisioning
for release of TCP. The same was ~GBP 17 mn.
• European operations currently have ~65 days of coking coal inventory compared to
a normal run rate of 45-50 days.
• Net loss in European operations was USD 120 mn.
• Finished steel inventory at European operations is ~60-65 days in terms of number
of days.
• Long-term contracts now include escalation clauses to mitigate the effect of volatile
raw material prices.
India operations
• India operations reported blended realization of INR 45.2k/t, a 5.5% Q-o-Q rise
against our assumption of 1% increase.
• EBITDA/t stood at INR 17.2k, 8.8% rise Q-o-Q and 31.6% Y-o-Y. At USD 384/t with
further rise expected going forward, our FY12 estimate of USD 375/t looks
achievable.
Other key points
• The Jamshedpur expansion of 2.9 mtpa will receive funding of INR ~18.8 bn through
the FPO proceeds of INR 35 bn. The balance will be utilized towards debt repayment
and other corporate purposes.
• On Y-o-Y comparison, debt has increased by ~USD 1.3 bn to USD 13.1 bn. Of the
increase, ~USD 250 mn is due to exchange fluctuation, ~USD 600 mn is in Corus
largely due to increased working capital, and ~USD 300 mn is for the Jamshedpur
expansion.
• The JV with Nippon Steel for 0.6 mtpa auto steel rolling plant has been finalized and
the plant is expected to be completed by 2013.
• Iron ore projects in Canada and coking coal in Mozambique are expected to start
operations by Q2CY12.
• The company is targeting net debt:EBITDA and debt:equity ratios of 2.5-2.7x and
1.0-1.2x, respectively.
Company Description
Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s second largest
private sector steel company. With the take over of Corus Steel (Europe’s second largest
steel producer), Tata Steel is now the sixth largest steel company in the world with over
31mtpa of steel capacity. Tata Steel’s Indian operations are amongst the lowest
producers of steel in the world comprising 6.8 mtpa steel making facility at Jamshedpur
in Jharkhand.
Investment Theme
We believe the worst is behind us for the global steel sector. Steel prices have started
increasing starting with China & India followed by hikes in USA and Europe. While low
capacity utilization will prevent outsized price rallies, we believe prices will move above
marginal cost. Demand is picking up slowly and we expect reasonable recovery in
European steel starting from Q2FY10 and going into FY11E. Tata Steel has already taken
steps for cost reduction and hits on the P&L for such restructuring. Led by all this, we
expect strong earnings growth in FY11E.
Key Risks
• Any delay in demand revival and/or renewed slump in European steel.
• Higher than anticipated Chinese/CIS steel exports into Europe.
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