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Tata Steel Ltd
Overweight
TISC.BO, TATA IN
TATA Europe site visit- On the right track but no
overnight surprises likely; Growth capex to likely surge
• UK is where meaningful delta should come from: We visited TATA’s
European operations in the UK (Port Talbot BF and Llanwern rolling mill). Post
the sale of Teeside, capacity stands at 18MT, with UK capacity at 11MT.
However the UK is split across 3 manufacturing locations in the UK – Port
Talbot (~5MT), Scunthorpe, and Rotherham. Ijmuiden (Netherlands, 7.8MT
capacity) is a world class plant (operating parameters at near benchmark
grades), operating at near peak utilization, and in our view accounts for a large
part of TATA Europe’s current profitability. In our view, years of underinvestment
in the UK pre-dating TATA’s acquisition, inefficient layout (the
UK operations are an amalgamation of the nationalized steel facilities and hence
there is some duplication of manufacturing foot print in terms of rolling mills,
we estimate there are 16 manufacturing/rolling sites all over UK, of which
actual steel making are only 3), operating inefficiencies, and lastly weak
demand, particularly in long steel (Ijmuiden has ~7MT of prod with ~10K
employees while UK operations which should have 7-7.5MT of prod in FY11E
would have 2x the employee base of Ijmuiden), have severely impacted the
UK operations. From here TATA is re-investing significantly in the UK
with 60mn pound investment in a BOS gas recovery project at Port Talbot
(which should allow Port Talbot to meaningfully reduce grid purchase), 185mn
pound investment in BF 4 at Port Talbot which would increase capacity by
0.3MT. More importantly TATA plans to increase coal injection at Port
Talbot from current levels of 120-140kg and take it to 220kg, which is near
Ijmuiden and should help in further cost reduction. To address staffing levels,
TATA is working on a flex model via which it is trying to make the fixed
employee cost more variable. Given the sharp downturn in long product market
(currently both Ijmuiden and Port Talbot are operating at near 90% utilization,
while Scunthorpe and Rotherham are sharply below). TATA is also increasing
value added steel (have introduced grades like DPR600 for the automotive
market). We estimate current sales to the auto sector should be +1MT of total
strip prod of ~10.5MT (total steel prod estimated at 14.5MT). We do not see
downside to our $55/MT (EBITDA) for FY12E and $75/MT for FY13E. Longer
term revival of long steel demand and potential development of a nearby coal
deposit could lead to further upside from current levels.
• As Europe stabilizes (and improves) and India expansion is commissioned,
growth capex surge likely: TATA highlighted that over the next few years,
both Tata Europe and India are likely to see meaningful capex (particularly in
the Orissa project), but would keep leverage at ~2.5x EBITDA (net debt to
EBITDA). While we had expected some net debt reduction as the India
expansion generates strong cash flows, we are not worried by the capex surge,
given that these are growth projects and are backed by Europe improvement and
India profitability). We continue to highlight that the biggest risk remains any
collapse in iron ore prices and/or a mining tax, which could severely negate
TATA India's profitability (FY12E at $365/MT, March-11E at +$400/MT)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Ltd
Overweight
TISC.BO, TATA IN
TATA Europe site visit- On the right track but no
overnight surprises likely; Growth capex to likely surge
• UK is where meaningful delta should come from: We visited TATA’s
European operations in the UK (Port Talbot BF and Llanwern rolling mill). Post
the sale of Teeside, capacity stands at 18MT, with UK capacity at 11MT.
However the UK is split across 3 manufacturing locations in the UK – Port
Talbot (~5MT), Scunthorpe, and Rotherham. Ijmuiden (Netherlands, 7.8MT
capacity) is a world class plant (operating parameters at near benchmark
grades), operating at near peak utilization, and in our view accounts for a large
part of TATA Europe’s current profitability. In our view, years of underinvestment
in the UK pre-dating TATA’s acquisition, inefficient layout (the
UK operations are an amalgamation of the nationalized steel facilities and hence
there is some duplication of manufacturing foot print in terms of rolling mills,
we estimate there are 16 manufacturing/rolling sites all over UK, of which
actual steel making are only 3), operating inefficiencies, and lastly weak
demand, particularly in long steel (Ijmuiden has ~7MT of prod with ~10K
employees while UK operations which should have 7-7.5MT of prod in FY11E
would have 2x the employee base of Ijmuiden), have severely impacted the
UK operations. From here TATA is re-investing significantly in the UK
with 60mn pound investment in a BOS gas recovery project at Port Talbot
(which should allow Port Talbot to meaningfully reduce grid purchase), 185mn
pound investment in BF 4 at Port Talbot which would increase capacity by
0.3MT. More importantly TATA plans to increase coal injection at Port
Talbot from current levels of 120-140kg and take it to 220kg, which is near
Ijmuiden and should help in further cost reduction. To address staffing levels,
TATA is working on a flex model via which it is trying to make the fixed
employee cost more variable. Given the sharp downturn in long product market
(currently both Ijmuiden and Port Talbot are operating at near 90% utilization,
while Scunthorpe and Rotherham are sharply below). TATA is also increasing
value added steel (have introduced grades like DPR600 for the automotive
market). We estimate current sales to the auto sector should be +1MT of total
strip prod of ~10.5MT (total steel prod estimated at 14.5MT). We do not see
downside to our $55/MT (EBITDA) for FY12E and $75/MT for FY13E. Longer
term revival of long steel demand and potential development of a nearby coal
deposit could lead to further upside from current levels.
• As Europe stabilizes (and improves) and India expansion is commissioned,
growth capex surge likely: TATA highlighted that over the next few years,
both Tata Europe and India are likely to see meaningful capex (particularly in
the Orissa project), but would keep leverage at ~2.5x EBITDA (net debt to
EBITDA). While we had expected some net debt reduction as the India
expansion generates strong cash flows, we are not worried by the capex surge,
given that these are growth projects and are backed by Europe improvement and
India profitability). We continue to highlight that the biggest risk remains any
collapse in iron ore prices and/or a mining tax, which could severely negate
TATA India's profitability (FY12E at $365/MT, March-11E at +$400/MT)
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