Tata Steel On the road -Tata Steel Europe :: Macquarie Research,

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Tata Steel
On the road -Tata Steel Europe Day 1
Event
 Day 1 at Tata Steel Europe: We visited Ijmuiden steel works of Tata Steel in
Netherlands. The highlight was the presentation by Dr Karl-Ulrich Kohler,
CEO of Tata Steel Europe. The business has laid out a good plan to improve
its operating margins to bring it on par with its European peers but may need
to incur capex. We maintain our Outperform recommendation but highlight the
risk due to slower de-leveraging.

Impact
 Ijmuiden – a world class plant: This is Tata Steel's largest plant with a
capacity of 8mtpa, right on the sea with a deep draft port attached. It includes
a 2mt coke oven, a 4.5mt sinter plant, a 4mt pellet plant, a hot strip mill with
capacity of 5.4mt and a cold rolled mill with 3mt capacity. It also sells 0.7mtpa
of slabs and employs 9,000 people. It caters to automotive, construction,
consumer appliances, electronics and general engineering.

 Tata Steel Europe targeting EBITDA at US$100/t latest by 5yrs:
Management is focused on restructuring its operations to make them more
customer focused (vs being product focused before). The target is to increase
differentiated product to 30% of production (currently 15%). However, it will
have to incur capex to achieve this target. This could be more than the
depreciation charge of $710m in FY10 or even higher if cost reduction has to
be achieved faster.
 Upside from raw material integration: Tata Steel’s investment in projects
for iron ore and coking coal is expected to provide around 10% raw material
integration in next 3–4 years starting from second half of FY13. This is not
included in the $100/t internal target and can result in more upside.
 Challenges – rising working capital requirement and carbon costs: Raw
material inflation has led to a sharp increase in working capital requirement.
The recent regulation on carbon floor price in EU from 2013 is likely to
increase the cost of steel making, and leave the European steel industry
uncompetitive globally.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs863.00 based on a PER methodology.
 Catalyst: 4QFY11 and FY11 annual results
Action and recommendation
 Maintain Outperform: Tata Steel is set to report good results for 4QFY11.
We think that no free cash generation in Europe for some time and capex
requirements in India will keep leverage high. Its turnaround is on track and
we believe any correction will be a perfect opportunity for long-term investors
to get exposure.