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Tata Steel Ltd Overweight
TISC.BO, TATA IN
TCP sale completed; We do not see any negative
impact on earnings for UK ops
• Completes sale of Teeside plant assets: Tata Steel announced the completion
of sale of certain assets of the partially mothballed Teeside (TCP capacity of
3.5MT) to Sahaviriya Steel (SSI) for $469MM (vs. indicative value of
$500MM). The TCP facility had to be mothballed in Feb-10 following the
inability by its consortium of buyer to meet the offtake agreement (that offtook
~78% of TCP’s production under LT agreement). The transaction follows the
initial announcement of the deal in Aug-10 and the definitive agreement signed
last month. The asset sale transaction includes the Redcar BF, Redcar & South
Bank coke oven, TCP's power generation facilities and the Lackenby
steelmaking and casting facilities. Tata Steel will continue to operate the tube
mills, section and beam mill. While the TCP sale is part of our cash flows, we
view the completion as positive event and expect portfolio rationalization to
continue.
• Will the TCP sale have a negative earnings impact?- There have been
concerns that the sale of TCP could have a negative impact on earnings given
that TATA Europe has seen some carbon credit earnings over the past few
quarters as steel production has been significantly lower than stated capacity.
While TATA has not given out details of the same, ‘other operating income’
over the last 4 quarters in overseas operations totaled Rs11.6bn and accounted
for 24% of EBITDA of international ops (much higher % over the last 3
quarters). We believe while there is come element of carbon credit gains in
‘other operating income' we do not think it is a very significant portion and do
not see the sale of TCP as having a negative impact on TATA Europe (Corus)
earnings from here.
• Is the UK Budget proposal of ‘carbon tax’ very negative for TATA
Europe?: Recently the UK Government has proposed imposing a ‘carbon floor
price for electricity generation to be introduced from April 1st, 2013 with
the floor price of ₤16/MT’. There have been concerns of this negatively
impacting TATA's UK facilities (we estimate CO2 at 1.75/MT for 1MT of crude
steel generally) as it would impose additional costs for the UK steel making
facilities and put it in an uncompetitive position. As of now the only thing clear
is the time line of implementation which is 2013 (if proposal is passed). There is
not enough clarity as to whether this would also apply to steel making facilities
or only utilities. JPM UK Utilities analyst Edmund Reid believes the proposal
would result in a tax of ₤2.7/MT. Also if this applies only to Utilities , then it
would impact only TATA’s EAF facilities in UK (we estimate capacity of
1.5MT), than the impact would be significantly lower.
• Remain OW- Near term steel environment remains choppy, but TATA's
investment case is strong: While steel prices are expected to remain choppy
over the next few months, TATA’s India expansion led investment case remains
strong, and we remain OW on the stock. We expect TATA India to report very
strong March and June quarters while Corus should also benefit from ASP-RM
mismatch in its favor (it would likely reverse in the Sept-Dec quarters)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Ltd Overweight
TISC.BO, TATA IN
TCP sale completed; We do not see any negative
impact on earnings for UK ops
• Completes sale of Teeside plant assets: Tata Steel announced the completion
of sale of certain assets of the partially mothballed Teeside (TCP capacity of
3.5MT) to Sahaviriya Steel (SSI) for $469MM (vs. indicative value of
$500MM). The TCP facility had to be mothballed in Feb-10 following the
inability by its consortium of buyer to meet the offtake agreement (that offtook
~78% of TCP’s production under LT agreement). The transaction follows the
initial announcement of the deal in Aug-10 and the definitive agreement signed
last month. The asset sale transaction includes the Redcar BF, Redcar & South
Bank coke oven, TCP's power generation facilities and the Lackenby
steelmaking and casting facilities. Tata Steel will continue to operate the tube
mills, section and beam mill. While the TCP sale is part of our cash flows, we
view the completion as positive event and expect portfolio rationalization to
continue.
• Will the TCP sale have a negative earnings impact?- There have been
concerns that the sale of TCP could have a negative impact on earnings given
that TATA Europe has seen some carbon credit earnings over the past few
quarters as steel production has been significantly lower than stated capacity.
While TATA has not given out details of the same, ‘other operating income’
over the last 4 quarters in overseas operations totaled Rs11.6bn and accounted
for 24% of EBITDA of international ops (much higher % over the last 3
quarters). We believe while there is come element of carbon credit gains in
‘other operating income' we do not think it is a very significant portion and do
not see the sale of TCP as having a negative impact on TATA Europe (Corus)
earnings from here.
• Is the UK Budget proposal of ‘carbon tax’ very negative for TATA
Europe?: Recently the UK Government has proposed imposing a ‘carbon floor
price for electricity generation to be introduced from April 1st, 2013 with
the floor price of ₤16/MT’. There have been concerns of this negatively
impacting TATA's UK facilities (we estimate CO2 at 1.75/MT for 1MT of crude
steel generally) as it would impose additional costs for the UK steel making
facilities and put it in an uncompetitive position. As of now the only thing clear
is the time line of implementation which is 2013 (if proposal is passed). There is
not enough clarity as to whether this would also apply to steel making facilities
or only utilities. JPM UK Utilities analyst Edmund Reid believes the proposal
would result in a tax of ₤2.7/MT. Also if this applies only to Utilities , then it
would impact only TATA’s EAF facilities in UK (we estimate capacity of
1.5MT), than the impact would be significantly lower.
• Remain OW- Near term steel environment remains choppy, but TATA's
investment case is strong: While steel prices are expected to remain choppy
over the next few months, TATA’s India expansion led investment case remains
strong, and we remain OW on the stock. We expect TATA India to report very
strong March and June quarters while Corus should also benefit from ASP-RM
mismatch in its favor (it would likely reverse in the Sept-Dec quarters)
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