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Tata Steel (TISC.BO)
Buy Equity Research
Jamshedpur plant visit: Expansion project on track; Conviction Buy
What's changed
We visited Tata Steel’s integrated plant at Jamshedpur, Jharkhand; our key
takeaways include: 1) Execution of growth projects is on track: 2.9 mtpa
capacity expansion project is on schedule with phased commissioning of
various facilities from Aug 2011. The pace of project execution is impressive,
with about 30,000 people engaged at the project site. More than the scale, the
complexity of managing a project of this size within the constraints of space
and resources is notable. 2) Downstream expansion to maintain share of
value-added products in the medium term: The downstream 0.6 mtpa
continuous annealing and processing line (JV with Nippon Steel) for autograde cold-rolled steel is making good progress and is scheduled to be
commissioned by 2013. Capacity expansion at Tinplate subsidiary and JV with
BlueScope would further strengthen the downstream presence, in our view.
3) Strong focus on achieving higher raw material integration: Tata
Steel remains committed to maintaining 50% self sufficiency in coking coal
and 100% in iron ore, post expansion. As such, the focus is on commencing
operations at developmental mines at Ankua, Kotre, etc., over the next 3-5 yrs.
Implications
The plant visit reaffirms our positive view on Tata Steel India operations,
which hinges upon sustained strong profitability (23% FY10-FY13E EBITDA
CAGR, 72% of consolidated EBITDA), driven by strong volume growth,
product mix geared to high margin value added products (market leader in
auto-grade steel) and highest vertical integration among peers.
Valuation
We reiterate Buy (on CL) on Tata Steel. We fine-tune our FY12E-FY13E EPS
and maintain our 12-m P/B-based TP of Rs761, implying 27% potential upside.
The stock is currently trading at 4.8X FY12E EV/EBITDA, at 23% disc to the
mid-cycle of 6.2X and 25% disc to peers.
Key risks
Delay in project execution, higher-than-expected increase in coal costs.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Brownfield expansion project on track
The expansion project at Jamshedpur is on track with phased commissioning of various
facilities scheduled from August 2011. We believe the pace of project execution is
impressive with 30,000 people engaged at the project site. More than the scale, the
complexity of managing a project of this size within the constraints of space and
resources is notable.
We believe this project will drive 19% FY11E-FY13E volume CAGR, improve
furnace productivity (through use of pellets) and raise logistical efficiencies.
With this, Tata Steel will be foraying into pelletisation and thin slab casting.
Strong downstream franchise to keep margins resilient
Tata Steel is a leading value-added steel player in India with a current downstream (coldrolled) capacity of 1.7 mn tons, and more than 40% of sales exposure to the
Auto/engineering segment. Tata Steel’s strong downstream franchise is reflected
in its higher realizations vs. peers, and stable/resilient margins across the cycle.
While Jamshedpur expansion project (to be onstream by Dec-2011) does not include any
downstream facility, the company continues to remain focused on maintaining
35%-40% share of value added products in its sales mix. In order to supplement
the increased upstream capacity, Tata Steel is developing integrated downstream
operations to enrich its product mix by increasing its production and sales of high valueadded steel products (see Exhibit 10).
In January 2011, the company entered into a joint venture with Nippon Steel Corporation
for the construction of a continuous annealing and processing line to produce automotive
cold-rolled flat products with a planned capacity of 600,000 tpa. The project is making
good progress and scheduled to be commissioned by 2013. We believe this will
significantly enhance the ultra low carbon IF steel making capability to cater to the high
end automotive steel applications (for outer skin panel). The company targets to
double its production of auto-grade steel to 2 mn tons by 2015.
As our India auto analyst expects the auto industry to grow at 15% CAGR in FY10-FY13E,
we believe the market leaders in the automotive sector will have an inherent advantage
both in terms of products and services offered. Tata Steel’s flat products division is a
market leader in the Indian automotive segment with a 42% market share. For ytd FY11,
Tata Steel is a market leader in both cold-rolled and galvanized coil/plates which are sold
at a 15% (US$120-130/ton) premium to HRC price vs. incremental cost of US$40-50/ton.
EBITDA margin for auto-grade steel could be as high as 55%-60% vs. 30%-35% for long
steel. We believe that Tata Steel (auto exposure = about 20%) is in the best
position vs. its peers to leverage its auto-grade experience, as auto-grade steel
customers are very sticky, and the barriers to entry are the highest in this
segment, given low margin of error and customization. Based on our channel
checks, Tata Steel’s auto-grade value added products are sold on average at a 10%-15%
premium to its competitors.
Focus on securing raw material integration
While Tata Steel India is well integrated at the upstream level, Tata Steel at a consolidated
level (inc. Tata Steel Europe) has a long way to go in raw material security. At a
consolidated level, Tata Steel sources about 35% of its iron ore requirements from captive
iron ore mines, with 75% of its coking coal requirements being met through imports.
In the past few years, the management has taken concrete initiatives to improve
its upstream integration, including acquisition of mines, joint ventures, etc.
In the recent past, Tata Steel’s move to increase stake in Australia-listed Riversdale
Mining from 24% to 27%, amid a bid by Rio Tinto, implies that the company considers it
to be a strategic asset and is focused on improving its coking coal integration.
Moreover, Tata Steel entered into an agreement with New Millennium Ltd to develop the
LabMag and KéMag iron ore deposits, known as the Taconite Project. The Taconite
Project consists of two magnetite iron ore deposits with 9 bn tons of reserves and
resources that could potentially produce 22 mn tons per year of iron ore concentrate. Tata
Steel will help develop and pay 64% of the total costs (C$50 mn) related to the feasibility
study for the Taconite Project, which is scheduled to be completed in 21 months. After the
feasibility study is completed, both companies could potentially form a joint venture to
develop the Taconite project, in which NML would hold a 20%-36% equity interest. The
project involves a capex of C$4.85 bn if both deposits are developed (and up to C$4.68 bn
and up to C$3.76 bn if only the KéMag or LabMag deposits are developed individually).
We believe that this is a long-term strategic positive for Tata Steel, again reflecting the
strong intent of Tata Steel’s management to improve the upstream integration, in a tight
inflationary raw material environment. With Tata Steel Europe’s iron ore requirement at
24 mn tons, this project could lead to 50%-60% iron ore integration for Tata Steel Europe,
which has no captive iron ore currently. Moreover, during the phase of the
feasibility study, the company would not have to make significant investment
(C$32 mn), and would not put the cash flows under pressure in the nearmedium term, in our view.
For India operations, the company remains committed to maintaining 100% self
sufficiency in iron ore and 50% in coking coal, post the expansion. It is working
towards commencing operations at the developmental mines at Ankua (iron ore), Kotre
Basantpur (coking coal) and Ganeshpur (thermal coal) over the next 3-5 years.
Based on the current projects announced (excluding Taconite project), we expect the
company to be 50% integrated in both iron ore/coking coal by CY14E, which would lead to
significant cost savings and margin expansion.
Ferro-alloy business going strong, high ROCEs across cycles
We believe that Tata Steel’s ferro alloys and minerals division (FAMD) is a free cash flow
generator for the company, and has consistently enjoyed ROCE of more than 200%.
While the FAMD segment constitutes 8% of 9MFY11 Tata Steel India’s operating profit,
Tata Steel is a significant competitor in the global market and the market leader in
ferrochrome business with a market share of around 27% in India and 6% globally. We
continue to stay positive on ferro alloy business—in our view, supply would be
constrained in the next 2-3 years, as no new ferrochrome capacity is coming on stream in
the next 2 years. Moreover, productions cuts are taking place in South Africa, given high
electricity tariffs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TISC.BO)
Buy Equity Research
Jamshedpur plant visit: Expansion project on track; Conviction Buy
What's changed
We visited Tata Steel’s integrated plant at Jamshedpur, Jharkhand; our key
takeaways include: 1) Execution of growth projects is on track: 2.9 mtpa
capacity expansion project is on schedule with phased commissioning of
various facilities from Aug 2011. The pace of project execution is impressive,
with about 30,000 people engaged at the project site. More than the scale, the
complexity of managing a project of this size within the constraints of space
and resources is notable. 2) Downstream expansion to maintain share of
value-added products in the medium term: The downstream 0.6 mtpa
continuous annealing and processing line (JV with Nippon Steel) for autograde cold-rolled steel is making good progress and is scheduled to be
commissioned by 2013. Capacity expansion at Tinplate subsidiary and JV with
BlueScope would further strengthen the downstream presence, in our view.
3) Strong focus on achieving higher raw material integration: Tata
Steel remains committed to maintaining 50% self sufficiency in coking coal
and 100% in iron ore, post expansion. As such, the focus is on commencing
operations at developmental mines at Ankua, Kotre, etc., over the next 3-5 yrs.
Implications
The plant visit reaffirms our positive view on Tata Steel India operations,
which hinges upon sustained strong profitability (23% FY10-FY13E EBITDA
CAGR, 72% of consolidated EBITDA), driven by strong volume growth,
product mix geared to high margin value added products (market leader in
auto-grade steel) and highest vertical integration among peers.
Valuation
We reiterate Buy (on CL) on Tata Steel. We fine-tune our FY12E-FY13E EPS
and maintain our 12-m P/B-based TP of Rs761, implying 27% potential upside.
The stock is currently trading at 4.8X FY12E EV/EBITDA, at 23% disc to the
mid-cycle of 6.2X and 25% disc to peers.
Key risks
Delay in project execution, higher-than-expected increase in coal costs.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Brownfield expansion project on track
The expansion project at Jamshedpur is on track with phased commissioning of various
facilities scheduled from August 2011. We believe the pace of project execution is
impressive with 30,000 people engaged at the project site. More than the scale, the
complexity of managing a project of this size within the constraints of space and
resources is notable.
We believe this project will drive 19% FY11E-FY13E volume CAGR, improve
furnace productivity (through use of pellets) and raise logistical efficiencies.
With this, Tata Steel will be foraying into pelletisation and thin slab casting.
Strong downstream franchise to keep margins resilient
Tata Steel is a leading value-added steel player in India with a current downstream (coldrolled) capacity of 1.7 mn tons, and more than 40% of sales exposure to the
Auto/engineering segment. Tata Steel’s strong downstream franchise is reflected
in its higher realizations vs. peers, and stable/resilient margins across the cycle.
While Jamshedpur expansion project (to be onstream by Dec-2011) does not include any
downstream facility, the company continues to remain focused on maintaining
35%-40% share of value added products in its sales mix. In order to supplement
the increased upstream capacity, Tata Steel is developing integrated downstream
operations to enrich its product mix by increasing its production and sales of high valueadded steel products (see Exhibit 10).
In January 2011, the company entered into a joint venture with Nippon Steel Corporation
for the construction of a continuous annealing and processing line to produce automotive
cold-rolled flat products with a planned capacity of 600,000 tpa. The project is making
good progress and scheduled to be commissioned by 2013. We believe this will
significantly enhance the ultra low carbon IF steel making capability to cater to the high
end automotive steel applications (for outer skin panel). The company targets to
double its production of auto-grade steel to 2 mn tons by 2015.
As our India auto analyst expects the auto industry to grow at 15% CAGR in FY10-FY13E,
we believe the market leaders in the automotive sector will have an inherent advantage
both in terms of products and services offered. Tata Steel’s flat products division is a
market leader in the Indian automotive segment with a 42% market share. For ytd FY11,
Tata Steel is a market leader in both cold-rolled and galvanized coil/plates which are sold
at a 15% (US$120-130/ton) premium to HRC price vs. incremental cost of US$40-50/ton.
EBITDA margin for auto-grade steel could be as high as 55%-60% vs. 30%-35% for long
steel. We believe that Tata Steel (auto exposure = about 20%) is in the best
position vs. its peers to leverage its auto-grade experience, as auto-grade steel
customers are very sticky, and the barriers to entry are the highest in this
segment, given low margin of error and customization. Based on our channel
checks, Tata Steel’s auto-grade value added products are sold on average at a 10%-15%
premium to its competitors.
Focus on securing raw material integration
While Tata Steel India is well integrated at the upstream level, Tata Steel at a consolidated
level (inc. Tata Steel Europe) has a long way to go in raw material security. At a
consolidated level, Tata Steel sources about 35% of its iron ore requirements from captive
iron ore mines, with 75% of its coking coal requirements being met through imports.
In the past few years, the management has taken concrete initiatives to improve
its upstream integration, including acquisition of mines, joint ventures, etc.
In the recent past, Tata Steel’s move to increase stake in Australia-listed Riversdale
Mining from 24% to 27%, amid a bid by Rio Tinto, implies that the company considers it
to be a strategic asset and is focused on improving its coking coal integration.
Moreover, Tata Steel entered into an agreement with New Millennium Ltd to develop the
LabMag and KéMag iron ore deposits, known as the Taconite Project. The Taconite
Project consists of two magnetite iron ore deposits with 9 bn tons of reserves and
resources that could potentially produce 22 mn tons per year of iron ore concentrate. Tata
Steel will help develop and pay 64% of the total costs (C$50 mn) related to the feasibility
study for the Taconite Project, which is scheduled to be completed in 21 months. After the
feasibility study is completed, both companies could potentially form a joint venture to
develop the Taconite project, in which NML would hold a 20%-36% equity interest. The
project involves a capex of C$4.85 bn if both deposits are developed (and up to C$4.68 bn
and up to C$3.76 bn if only the KéMag or LabMag deposits are developed individually).
We believe that this is a long-term strategic positive for Tata Steel, again reflecting the
strong intent of Tata Steel’s management to improve the upstream integration, in a tight
inflationary raw material environment. With Tata Steel Europe’s iron ore requirement at
24 mn tons, this project could lead to 50%-60% iron ore integration for Tata Steel Europe,
which has no captive iron ore currently. Moreover, during the phase of the
feasibility study, the company would not have to make significant investment
(C$32 mn), and would not put the cash flows under pressure in the nearmedium term, in our view.
For India operations, the company remains committed to maintaining 100% self
sufficiency in iron ore and 50% in coking coal, post the expansion. It is working
towards commencing operations at the developmental mines at Ankua (iron ore), Kotre
Basantpur (coking coal) and Ganeshpur (thermal coal) over the next 3-5 years.
Based on the current projects announced (excluding Taconite project), we expect the
company to be 50% integrated in both iron ore/coking coal by CY14E, which would lead to
significant cost savings and margin expansion.
Ferro-alloy business going strong, high ROCEs across cycles
We believe that Tata Steel’s ferro alloys and minerals division (FAMD) is a free cash flow
generator for the company, and has consistently enjoyed ROCE of more than 200%.
While the FAMD segment constitutes 8% of 9MFY11 Tata Steel India’s operating profit,
Tata Steel is a significant competitor in the global market and the market leader in
ferrochrome business with a market share of around 27% in India and 6% globally. We
continue to stay positive on ferro alloy business—in our view, supply would be
constrained in the next 2-3 years, as no new ferrochrome capacity is coming on stream in
the next 2 years. Moreover, productions cuts are taking place in South Africa, given high
electricity tariffs
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