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UBS Investment Research
Tata Steel Ltd.
Q3FY11 results largely in line
Standalone results better than estimates; Consolidated results in line
Tata Steel standalone PAT of Rs15.1bn (+5%QoQ, +20%YoY) was better than
UBS estimate of Rs13.1bn and consensus estimate of Rs14.4bn. Consolidated preex
PAT of Rs9.3bn (-17%QoQ, +61%YoY) was largely in line with our estimates
though lower than the consensus estimate of Rs11.4bn. Better than expected
standalone numbers were offset by muted results in Corus & South-East Asia
regions. Tata Steel has achieved 77% of our FY11 PAT estimates in 9MFY11.
Corus results below expectations on higher raw material costs
Corus’ EBITDA of US$88mn (-38%YoY, -55%QoQ) was lower than our est of
US$113mn. EBITDA/t at Corus declined 55% QoQ to US$25/t (vs our est of
US$32/t). EBITDA in SEA units declined from US$29mn in Q2FY11 to a loss of
US$3mn in Q3. Standalone EBITDA of Rs27.5bn (+21%YoY) was better than our
est of Rs24.5bn due to lower than expected staff & operating costs. Net Sales of
Rs73.3bn (+16%YoY) were in line. EBITDA margins rose 110bps QoQ to 37.5%.
Received environmental approval for Phase 1 of DSO project (iron ore)
New Millenium Corp (Tata Steel holds 27% stake in it) has received environmental
approval for phase 1 of Direct Shipping Ore (DSO) project in Canada (2P reserves
of 64mt) & expects production of 4mt of sinter fines from Q2CY2012 (This will
lead to Corus’ iron ore integration reaching 17% at 80% steel capacity utilisation).
Valuation: Maintain Buy and PT of Rs820
We continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
Europe at 6x and others at 6.5x EV/EBITDA on normalized EBITDA (FY12-13E).
Standalone Net Sales of Rs73.3bn (+4%QoQ, 16%YoY) were in line with
our estimates of Rs73.1bn. EBITDA of Rs27.5bn (+7%QoQ, +21%YoY)
was better than our estimates of Rs24.5bn primarily due to lower than
expected staff, raw material and other costs. EBITDA margins improved
110bps QoQ to 37.5%.
Staff costs declined cRs1bn QoQ to Rs5.99bn due to a one-off provision of
cRs1bn in Q2FY11 which did not recur in Q3FY11.
Average steel realisations increased 6%QoQ to Rs41,299/t due to increased
realisations in the long product segment and better product mix.
Average net selling prices for long products increased 6%QoQ to Rs29,150/t
whereas average net selling price for flat products remained flat QoQ at
Rs35,300/t in Q3FY11 (vs Rs35,600/t in Q2FY11).
Corus’ EBITDA of US$88mn (-38%YoY, -55%QoQ) was lower than our
estimate of US$113mn. EBITDA/t at Corus declined 55% QoQ to US$25/t
(vs our est of US$32/t).
Corus reported a net loss of US$120mn in Q3FY11.
Corus’ capacity utilisation in Q3FY11 was between 75-80% and is operating
at similar levels. Company expects to operate at c80% capacity utilisation in
FY12 as it expects recovery in Europe to be muted.
Consolidated net debt is cRs528bn (US$11.7bn) as at Dec 31, 2010.
However, this does not include the recent equity raised of US$778mn (FPO
in Jan 2011). Sales from TCP plant will further reduce net debt by
cUS$500mn
Of the US$778mn raised through the FPO (Jan 2011), US$419mn will be
spent towards part-financing the 2.9mt expansion in Jamshedpur and
US$244mn will be used for redemption payment of the maturing redeemable
non-convertible debentures.
Finished goods inventory in Indian operations is close to 33 days vs 55 days
in Corus.
The company expects its JV with Nippon Steel (51:49) for 0.6mt automotive
cold rolled steel mill at Jamshedpur to come onstream in 2013. The company
expects this JV to address the localization needs of Indian automotive
customers for high grade cold rolled
New Millenium Corp (Tata Steel holds 27% stake in it) has received
environmental approval for phase 1 of Direct Shipping Ore (DSO) project in
Canada (2P reserves of 64mt) & expects production of 4mt of sinter fines
from Q2CY2012 (This will lead to Corus’ iron ore integration reaching 17%
at 80% steel capacity utilisation). NML has proposed a public offering to
raise C$55mn. Tata Steel has pre-emptive rights to maintain its stake in the
event of a public offering. It is still evaluating this option.
Tata Steel has received partial final in favour of Tata Steel UK (TSUK) in
ongoing arbitration between TSUK and certain off-takers of its TCP unit on
5 Jan 2011. The arbitration proceedings will now move to the next phase of
determining the amount of damages.
Tata Steel has started preparation to start construction work on the 6mt
Orissa project. We however, don’t value the Orissa project in our estimates
currently.
We continue to prefer Tata Steel as our top pick in the Indian steel sector.
We believe Tata Steel’s earning will be supported by a) 2.9mt capacity
expansion in Jamshedpur (by Dec quarter 2010) increasing its total Indian
crude steel capacity to 9.7mt b) Corus will benefit from increased integration
by FY13 - 4mt of iron ore from DSO project Canada and 1mt of coking coal
from Benga, Riversdale will increase Corus’ iron ore and coking coal
integration to 17%/9% levels from 0% currently (assuming Corus operates at
80% capacity utilisation).
In our valuation of Tata Steel, we don’t include the value of Tata Steel’s 24%
stake in Riversdale in our valuation. At Rio Tinto’s bid of A$16/share of
Riversdale, Tata Steel’s stake in Riversdale would be cRs46/share We
continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
Europe at 6x and others at 6.5x EV/EBITDA on normalized EBITDA
(FY12-13E).
Tata Steel Ltd.
Established in 1907, Tata Steel, the Tata Group's flagship company, is the
world's sixth largest steel company with presence in 50 countries and crude steel
production capacity of 30mtpa, following the acquisition of Corus Group in
2007. It plans to increase production capacity in its Jamshedpur plant, one of the
world's most modern steel making and finishing facilities, from 6.8mtpa to
10mtpa by 2010. Tata Steel has captive iron ore and coal mines. It has plans for
greenfield expansion in Jharkhand, Orissa and Chhattisgarh.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations, based on global
and domestic steel prices and the prices of key raw materials such as coking coal
which are difficult to predict. Tata Steel’s backward integration for key raw
materials such as iron ore and downstream expansion into value added products
would only partly mitigate the impact of these variables.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Steel Ltd.
Q3FY11 results largely in line
Standalone results better than estimates; Consolidated results in line
Tata Steel standalone PAT of Rs15.1bn (+5%QoQ, +20%YoY) was better than
UBS estimate of Rs13.1bn and consensus estimate of Rs14.4bn. Consolidated preex
PAT of Rs9.3bn (-17%QoQ, +61%YoY) was largely in line with our estimates
though lower than the consensus estimate of Rs11.4bn. Better than expected
standalone numbers were offset by muted results in Corus & South-East Asia
regions. Tata Steel has achieved 77% of our FY11 PAT estimates in 9MFY11.
Corus results below expectations on higher raw material costs
Corus’ EBITDA of US$88mn (-38%YoY, -55%QoQ) was lower than our est of
US$113mn. EBITDA/t at Corus declined 55% QoQ to US$25/t (vs our est of
US$32/t). EBITDA in SEA units declined from US$29mn in Q2FY11 to a loss of
US$3mn in Q3. Standalone EBITDA of Rs27.5bn (+21%YoY) was better than our
est of Rs24.5bn due to lower than expected staff & operating costs. Net Sales of
Rs73.3bn (+16%YoY) were in line. EBITDA margins rose 110bps QoQ to 37.5%.
Received environmental approval for Phase 1 of DSO project (iron ore)
New Millenium Corp (Tata Steel holds 27% stake in it) has received environmental
approval for phase 1 of Direct Shipping Ore (DSO) project in Canada (2P reserves
of 64mt) & expects production of 4mt of sinter fines from Q2CY2012 (This will
lead to Corus’ iron ore integration reaching 17% at 80% steel capacity utilisation).
Valuation: Maintain Buy and PT of Rs820
We continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
Europe at 6x and others at 6.5x EV/EBITDA on normalized EBITDA (FY12-13E).
Standalone Net Sales of Rs73.3bn (+4%QoQ, 16%YoY) were in line with
our estimates of Rs73.1bn. EBITDA of Rs27.5bn (+7%QoQ, +21%YoY)
was better than our estimates of Rs24.5bn primarily due to lower than
expected staff, raw material and other costs. EBITDA margins improved
110bps QoQ to 37.5%.
Staff costs declined cRs1bn QoQ to Rs5.99bn due to a one-off provision of
cRs1bn in Q2FY11 which did not recur in Q3FY11.
Average steel realisations increased 6%QoQ to Rs41,299/t due to increased
realisations in the long product segment and better product mix.
Average net selling prices for long products increased 6%QoQ to Rs29,150/t
whereas average net selling price for flat products remained flat QoQ at
Rs35,300/t in Q3FY11 (vs Rs35,600/t in Q2FY11).
Corus’ EBITDA of US$88mn (-38%YoY, -55%QoQ) was lower than our
estimate of US$113mn. EBITDA/t at Corus declined 55% QoQ to US$25/t
(vs our est of US$32/t).
Corus reported a net loss of US$120mn in Q3FY11.
Corus’ capacity utilisation in Q3FY11 was between 75-80% and is operating
at similar levels. Company expects to operate at c80% capacity utilisation in
FY12 as it expects recovery in Europe to be muted.
Consolidated net debt is cRs528bn (US$11.7bn) as at Dec 31, 2010.
However, this does not include the recent equity raised of US$778mn (FPO
in Jan 2011). Sales from TCP plant will further reduce net debt by
cUS$500mn
Of the US$778mn raised through the FPO (Jan 2011), US$419mn will be
spent towards part-financing the 2.9mt expansion in Jamshedpur and
US$244mn will be used for redemption payment of the maturing redeemable
non-convertible debentures.
Finished goods inventory in Indian operations is close to 33 days vs 55 days
in Corus.
The company expects its JV with Nippon Steel (51:49) for 0.6mt automotive
cold rolled steel mill at Jamshedpur to come onstream in 2013. The company
expects this JV to address the localization needs of Indian automotive
customers for high grade cold rolled
New Millenium Corp (Tata Steel holds 27% stake in it) has received
environmental approval for phase 1 of Direct Shipping Ore (DSO) project in
Canada (2P reserves of 64mt) & expects production of 4mt of sinter fines
from Q2CY2012 (This will lead to Corus’ iron ore integration reaching 17%
at 80% steel capacity utilisation). NML has proposed a public offering to
raise C$55mn. Tata Steel has pre-emptive rights to maintain its stake in the
event of a public offering. It is still evaluating this option.
Tata Steel has received partial final in favour of Tata Steel UK (TSUK) in
ongoing arbitration between TSUK and certain off-takers of its TCP unit on
5 Jan 2011. The arbitration proceedings will now move to the next phase of
determining the amount of damages.
Tata Steel has started preparation to start construction work on the 6mt
Orissa project. We however, don’t value the Orissa project in our estimates
currently.
We continue to prefer Tata Steel as our top pick in the Indian steel sector.
We believe Tata Steel’s earning will be supported by a) 2.9mt capacity
expansion in Jamshedpur (by Dec quarter 2010) increasing its total Indian
crude steel capacity to 9.7mt b) Corus will benefit from increased integration
by FY13 - 4mt of iron ore from DSO project Canada and 1mt of coking coal
from Benga, Riversdale will increase Corus’ iron ore and coking coal
integration to 17%/9% levels from 0% currently (assuming Corus operates at
80% capacity utilisation).
In our valuation of Tata Steel, we don’t include the value of Tata Steel’s 24%
stake in Riversdale in our valuation. At Rio Tinto’s bid of A$16/share of
Riversdale, Tata Steel’s stake in Riversdale would be cRs46/share We
continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
Europe at 6x and others at 6.5x EV/EBITDA on normalized EBITDA
(FY12-13E).
Tata Steel Ltd.
Established in 1907, Tata Steel, the Tata Group's flagship company, is the
world's sixth largest steel company with presence in 50 countries and crude steel
production capacity of 30mtpa, following the acquisition of Corus Group in
2007. It plans to increase production capacity in its Jamshedpur plant, one of the
world's most modern steel making and finishing facilities, from 6.8mtpa to
10mtpa by 2010. Tata Steel has captive iron ore and coal mines. It has plans for
greenfield expansion in Jharkhand, Orissa and Chhattisgarh.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations, based on global
and domestic steel prices and the prices of key raw materials such as coking coal
which are difficult to predict. Tata Steel’s backward integration for key raw
materials such as iron ore and downstream expansion into value added products
would only partly mitigate the impact of these variables.
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