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Tata Steel- BUY
A new dawn approaches
Tata Steel is on the cusp of a structural improvement in its growth profile. We
see Indian capacity rising 43% and greater raw-material security from new
mine starts in Canada and Mozambique by end-FY12. Initiatives at European
unit Corus will lift mid-cycle Ebitda/tonne to US$80-100 in two to three years.
We expect a 22% earnings Cagr for Tata in FY12-15. With meaningful
derisking - reduced steel-price sensitivity and balance-sheet deleveraging -
underway, the stock can rerate. BUY to our Rs810 target price.
Bigger and better Indian capacity
Tata Steel’s 2.9mtpa expansion at Jamshedpur is on track for commissioning by
end-FY12 and will drive a strong 17% volume Cagr in India over FY12-14.
Expansion in cold-rolled mill capacity will boost sales of wider-margin products
while a 9% drop in the workforce will cut costs.
A tightening Indian steel demand-supply imbalance and Tata’s captive raw-material
advantage in an age of higher prices augur well for margins in its local business.
Raw-material security to improve
Tata Steel will start production in its iron-ore mines in Canada and coking-coal
mines in Mozambique by end-FY12.
Sales from these operations will provide a natural hedge to the raw materials that
Corus buys and will contribute 8-13% of consolidated profit over FY13-15.
The group’s global raw-material self-sufficiency will improve from 37% in FY11 to
53% in FY15 for iron ore, and from 18% to 39% for coking coal.
Multiple cost initiatives at Corus
Continued weakness in the European steel industry more than offset the ‘Fit for
future’ programme cost savings over 2009-10.
Corus has now embarked on Phase 2 of its programme, which will improve midcycle
Ebitda/tonne from US$50-60 now to US$80-100 in two to three years.
A more derisked profile
Tata Steel is on the cusp of a strong growth phase driven by multiple earnings catalysts.
The low-cost Indian operations will become a larger share of consolidated volume.
The sensitivity of earnings to steel prices will decline and balance-sheet
deleveraging will gather pace in the coming years.
Given a more derisked profile, Tata Steel’s multiples should expand and the
valuation gap with global peers should narrow.
Our Rs810 sum-of-parts-based target price suggests 39% upside.
Investment by numbers
Tata Steel’s 2.9mtpa India expansion is on track for commissioning by end-FY12
and will drive strong 17% volume Cagr in India over FY12-14. Expansions in coldrolled
mill capacity will improve sales of wider-margin products while a 9% drop in
workforce will lower costs. We estimate Tata Steel's India net profit to enjoy a 9%
Cagr over FY11-13.
Tata Steel will start production in its overseas iron-ore and coking-coal mines by
end-FY12 which will lead to improved raw-material self-sufficiency, from 37% in
FY11 to 53% in FY15 for iron ore and from 18% to 39% for coking coal. Sales from
these mining operations will contribute 8-13% of consolidated profit over FY13-15.
Corus has now embarked on Phase II of its cost-reduction programme, which aims
to cut costs by US$30-40/t and improve mid-cycle Ebitda/t to US$80-100 in two to
three years from US$50-60.
We expect Tata Steel to deliver a 22% EPS Cagr over FY12-15 as the full benefits
of the India expansion, raw-material projects and cost reduction in Corus flows
through. Share of the low-cost India operations will rise in consolidated volumes,
sensitivity of earnings to steel prices will decline and balance sheet deleveraging
will gather pace in the coming years. Given a more derisked profile, Tata Steel’s
multiples could expand and the valuation gap with global peers could narrow.
Risks to our view
The draft mining bill in India contains a clause that requires mining companies to
pay 26% of mining profit to people displaced by the mining activity. As a large part
of profits in Tata Steel’s India operations are driven by captive raw materials, we
see risks to the profitability of the Indian operations if the bill were to be passed as
a law with the profit-sharing clause included.
Higher iron-ore prices typically result in higher levels of profitability for Tata’s India
business as it has 100% captive iron ore. If iron ore prices were to see a sharp
drop, steel prices would follow suit with a lag. In such a scenario, Tata’s India
margins would see a sharp compression since it would see ASPs drop but would see
no benefit of the drop in iron ore prices.
Any delay in the India capacity expansion to 9.7mtpa would result in downside to
our FY13 estimates and valuation for the stock. Other risks include: supply glut in
India flat-steel market; further weakness in European steel industry; and delays in
overseas mining projects.
Tata Steel - Rs582.00 - BUY
The business Competition & market franchise
Tata Steel is the world's seventh-largest steel producer with
total capacity of 27.2mt - India (6.8mt), UK & Netherlands
(18.4mt) and Southeast Asia (2.0mt). Tata is expanding its
India capacity to 9.7mt by March 2012 and also plans to build
a 6mt greenfield plant in Orissa by 2015-17. Tata Steel is also
expanding its cold-rolling capacity from 1.2mt to 2.1mt by
FY14. It holds stakes in various overseas development-stage
iron ore and coal projects. Tata's Indian facilities have 100%
captive iron ore and 50% captive coking coal, providing it an
enormous cost advantage.
Tata Steel's Indian operations are among the lowest cost in
the world due to captive raw-material advantage. In India, its
competitors include companies like SAIL, JSW Steel, JSPL,
RINL and Essar Steel, and secondary producers, mini-mills and
importers. Tata Steel's European arm, Corus, is one the
largest steel companies in Europe. Its primary markets are the
UK and Western Europe where competitors include large
players such as ArcelorMittal and Thyssenkrupp, and smaller
producers such as Celsa, Salzgitter, Voestalpine, Metinvest
and SSAB, as well as importers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel- BUY
A new dawn approaches
Tata Steel is on the cusp of a structural improvement in its growth profile. We
see Indian capacity rising 43% and greater raw-material security from new
mine starts in Canada and Mozambique by end-FY12. Initiatives at European
unit Corus will lift mid-cycle Ebitda/tonne to US$80-100 in two to three years.
We expect a 22% earnings Cagr for Tata in FY12-15. With meaningful
derisking - reduced steel-price sensitivity and balance-sheet deleveraging -
underway, the stock can rerate. BUY to our Rs810 target price.
Bigger and better Indian capacity
Tata Steel’s 2.9mtpa expansion at Jamshedpur is on track for commissioning by
end-FY12 and will drive a strong 17% volume Cagr in India over FY12-14.
Expansion in cold-rolled mill capacity will boost sales of wider-margin products
while a 9% drop in the workforce will cut costs.
A tightening Indian steel demand-supply imbalance and Tata’s captive raw-material
advantage in an age of higher prices augur well for margins in its local business.
Raw-material security to improve
Tata Steel will start production in its iron-ore mines in Canada and coking-coal
mines in Mozambique by end-FY12.
Sales from these operations will provide a natural hedge to the raw materials that
Corus buys and will contribute 8-13% of consolidated profit over FY13-15.
The group’s global raw-material self-sufficiency will improve from 37% in FY11 to
53% in FY15 for iron ore, and from 18% to 39% for coking coal.
Multiple cost initiatives at Corus
Continued weakness in the European steel industry more than offset the ‘Fit for
future’ programme cost savings over 2009-10.
Corus has now embarked on Phase 2 of its programme, which will improve midcycle
Ebitda/tonne from US$50-60 now to US$80-100 in two to three years.
A more derisked profile
Tata Steel is on the cusp of a strong growth phase driven by multiple earnings catalysts.
The low-cost Indian operations will become a larger share of consolidated volume.
The sensitivity of earnings to steel prices will decline and balance-sheet
deleveraging will gather pace in the coming years.
Given a more derisked profile, Tata Steel’s multiples should expand and the
valuation gap with global peers should narrow.
Our Rs810 sum-of-parts-based target price suggests 39% upside.
Investment by numbers
Tata Steel’s 2.9mtpa India expansion is on track for commissioning by end-FY12
and will drive strong 17% volume Cagr in India over FY12-14. Expansions in coldrolled
mill capacity will improve sales of wider-margin products while a 9% drop in
workforce will lower costs. We estimate Tata Steel's India net profit to enjoy a 9%
Cagr over FY11-13.
Tata Steel will start production in its overseas iron-ore and coking-coal mines by
end-FY12 which will lead to improved raw-material self-sufficiency, from 37% in
FY11 to 53% in FY15 for iron ore and from 18% to 39% for coking coal. Sales from
these mining operations will contribute 8-13% of consolidated profit over FY13-15.
Corus has now embarked on Phase II of its cost-reduction programme, which aims
to cut costs by US$30-40/t and improve mid-cycle Ebitda/t to US$80-100 in two to
three years from US$50-60.
We expect Tata Steel to deliver a 22% EPS Cagr over FY12-15 as the full benefits
of the India expansion, raw-material projects and cost reduction in Corus flows
through. Share of the low-cost India operations will rise in consolidated volumes,
sensitivity of earnings to steel prices will decline and balance sheet deleveraging
will gather pace in the coming years. Given a more derisked profile, Tata Steel’s
multiples could expand and the valuation gap with global peers could narrow.
Risks to our view
The draft mining bill in India contains a clause that requires mining companies to
pay 26% of mining profit to people displaced by the mining activity. As a large part
of profits in Tata Steel’s India operations are driven by captive raw materials, we
see risks to the profitability of the Indian operations if the bill were to be passed as
a law with the profit-sharing clause included.
Higher iron-ore prices typically result in higher levels of profitability for Tata’s India
business as it has 100% captive iron ore. If iron ore prices were to see a sharp
drop, steel prices would follow suit with a lag. In such a scenario, Tata’s India
margins would see a sharp compression since it would see ASPs drop but would see
no benefit of the drop in iron ore prices.
Any delay in the India capacity expansion to 9.7mtpa would result in downside to
our FY13 estimates and valuation for the stock. Other risks include: supply glut in
India flat-steel market; further weakness in European steel industry; and delays in
overseas mining projects.
Tata Steel - Rs582.00 - BUY
The business Competition & market franchise
Tata Steel is the world's seventh-largest steel producer with
total capacity of 27.2mt - India (6.8mt), UK & Netherlands
(18.4mt) and Southeast Asia (2.0mt). Tata is expanding its
India capacity to 9.7mt by March 2012 and also plans to build
a 6mt greenfield plant in Orissa by 2015-17. Tata Steel is also
expanding its cold-rolling capacity from 1.2mt to 2.1mt by
FY14. It holds stakes in various overseas development-stage
iron ore and coal projects. Tata's Indian facilities have 100%
captive iron ore and 50% captive coking coal, providing it an
enormous cost advantage.
Tata Steel's Indian operations are among the lowest cost in
the world due to captive raw-material advantage. In India, its
competitors include companies like SAIL, JSW Steel, JSPL,
RINL and Essar Steel, and secondary producers, mini-mills and
importers. Tata Steel's European arm, Corus, is one the
largest steel companies in Europe. Its primary markets are the
UK and Western Europe where competitors include large
players such as ArcelorMittal and Thyssenkrupp, and smaller
producers such as Celsa, Salzgitter, Voestalpine, Metinvest
and SSAB, as well as importers.
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