Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volume and margin expansion
Margins for Tata Steel's India steel business are likely to expand in FY12, driven
by higher steel prices. Its India business has 100% iron ore integration and 50%
coking coal integration. Steel prices have already responded to the anticipated
increase in raw material prices.
Volumes for the India business will increase 5% in FY12, followed by bigger increase
of 24% to 8.5m tons in FY13 due to expansion of capacity by 3mtpa to 10mtpa by
December 2011. Margins for new volumes will be lower because captive production
of coking coal will not grow in line with steel production, necessitating dependence
on higher cost external sources. However, margins will be higher than non-integrated
players, as its captive iron ore production will keep pace.
Fixed cost too will decline, as manpower is expected to decline 12% to 30,000 by
the end of FY12, while volumes will increase 24% in FY13.
Captive iron ore and coal mines ensure uninterrupted supply of raw material to
India business, while competition remains vulnerable to raw material supply
disruption.
Overseas investment in raw material assets, Riversdale and New Millennium Capital
will start generating cash flows in FY12, with the start of coking coal and iron ore
production, respectively. These investments are worth US$2b-2.5b at current market
prices.
Coking coal production is expected to start from Riversdale in Mozambique in
2HFY12, with stage-1 capacity of 1.7mtpa. Share of Tata Steel in Riversdale coking
coal production is likely to be 0.9m tons in FY12, with potential to generate EBITDA
of US$150m-200m.
New Millennium too is expected to start iron ore production from DSO project in
1HFY13, which will ultimately ramp up to 4m-5m tons. Tata Steel's share will be
~85%, which has the potential to generate EBITDA of US$300m-350m at current
iron ore prices.
Tata Steel Europe (TSE), the erstwhile Corus, too may have self-sustaining cash
flows, with proceeds from the sale of Teesside invested in improving operating
efficiencies, resulting in margin expansion. Currently, TSE margins are significantly
lower than many other players in the region. Management is now guiding that
normalized EBITDA per ton will expand from USS$50 to US$80 in two years. TSE
will generate EBITDA of US$750m (15m tons x US$50/ton) in FY12 and US$1.05b
(15m tons x US$70/ton) in FY13.
Tata Steel still has an investment of US$800m in group company, Tata Motors,
which can bring further cash to the company if the promoter continues to buy as
it did in the last two years.
We believe that growth in high margin businesses both in India and overseas
mineral investments will drive earnings growth. Cash flows from India business
will continue to rise. Focus on cutting costs and improving productivity will aid
long-term earnings sustainability. The stock trades at an attractive EV of 5.4x
FY12E and 4.1x FY13E EBITDA. We reiterate Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volume and margin expansion
Margins for Tata Steel's India steel business are likely to expand in FY12, driven
by higher steel prices. Its India business has 100% iron ore integration and 50%
coking coal integration. Steel prices have already responded to the anticipated
increase in raw material prices.
Volumes for the India business will increase 5% in FY12, followed by bigger increase
of 24% to 8.5m tons in FY13 due to expansion of capacity by 3mtpa to 10mtpa by
December 2011. Margins for new volumes will be lower because captive production
of coking coal will not grow in line with steel production, necessitating dependence
on higher cost external sources. However, margins will be higher than non-integrated
players, as its captive iron ore production will keep pace.
Fixed cost too will decline, as manpower is expected to decline 12% to 30,000 by
the end of FY12, while volumes will increase 24% in FY13.
Captive iron ore and coal mines ensure uninterrupted supply of raw material to
India business, while competition remains vulnerable to raw material supply
disruption.
Overseas investment in raw material assets, Riversdale and New Millennium Capital
will start generating cash flows in FY12, with the start of coking coal and iron ore
production, respectively. These investments are worth US$2b-2.5b at current market
prices.
Coking coal production is expected to start from Riversdale in Mozambique in
2HFY12, with stage-1 capacity of 1.7mtpa. Share of Tata Steel in Riversdale coking
coal production is likely to be 0.9m tons in FY12, with potential to generate EBITDA
of US$150m-200m.
New Millennium too is expected to start iron ore production from DSO project in
1HFY13, which will ultimately ramp up to 4m-5m tons. Tata Steel's share will be
~85%, which has the potential to generate EBITDA of US$300m-350m at current
iron ore prices.
Tata Steel Europe (TSE), the erstwhile Corus, too may have self-sustaining cash
flows, with proceeds from the sale of Teesside invested in improving operating
efficiencies, resulting in margin expansion. Currently, TSE margins are significantly
lower than many other players in the region. Management is now guiding that
normalized EBITDA per ton will expand from USS$50 to US$80 in two years. TSE
will generate EBITDA of US$750m (15m tons x US$50/ton) in FY12 and US$1.05b
(15m tons x US$70/ton) in FY13.
Tata Steel still has an investment of US$800m in group company, Tata Motors,
which can bring further cash to the company if the promoter continues to buy as
it did in the last two years.
We believe that growth in high margin businesses both in India and overseas
mineral investments will drive earnings growth. Cash flows from India business
will continue to rise. Focus on cutting costs and improving productivity will aid
long-term earnings sustainability. The stock trades at an attractive EV of 5.4x
FY12E and 4.1x FY13E EBITDA. We reiterate Buy.
No comments:
Post a Comment