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Tata Steel (TISC.BO)
Buy Equity Research
Riversdale stake sale boosts cash to fund growth projects; CL-Buy
What's changed
Tata Steel announced that it has decided to divest its entire 26.27% stake
in Riversdale Mining Limited (RML) to Rio Tinto (RIO) in the ongoing
takeover offer. The sale consideration of A$1,060 mn (about US$ 1,115 mn)
translates into a gain of 100% over its average acquisition cost over the
past 3 years. Tata Steel will continue to own a 35% stake in its Joint
Venture with RML for the Benga coking coal project in Mozambique, which
is due to commence operations by end CY2011 – with offtake rights for
40% of the output from this project. Benga currently has coal resources of
4 bn tons and reserves of 502 mn tons.
Implications
We highlight the following: (1) Tata will continue to have its strategic
interest of rights to 40% offtake secured through its holding in the Benga
project in an increasingly tight global coking coal market, (2)
monetization of a successful investment (2X in under 3 years), which in
our view was not being ascribed any value by the market; and (3) it will
boost the cash pile and book value by about Rs 52/share and reduces net
debt from US$ 10.4bn at end March 2011 to US$ 9.3bn, which can then be
deployed to fund various growth projects.
Valuation
Pending completion of the transaction, we do not factor this in our
estimates. At 5.1x EV/EBITDA, the stock is trading at 18% discount to its
mid-cycle of 6.2X and looks attractively valued. We reiterate our Buy rating
(on CL) with P/B based 12-m target price of Rs774, implying 40% potential
upside. We introduce 3/14E EPS of Rs112.82.
Key risks
Weaker demand, margin squeeze from cost inflation and delays in growth
projects.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutra
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TISC.BO)
Buy Equity Research
Riversdale stake sale boosts cash to fund growth projects; CL-Buy
What's changed
Tata Steel announced that it has decided to divest its entire 26.27% stake
in Riversdale Mining Limited (RML) to Rio Tinto (RIO) in the ongoing
takeover offer. The sale consideration of A$1,060 mn (about US$ 1,115 mn)
translates into a gain of 100% over its average acquisition cost over the
past 3 years. Tata Steel will continue to own a 35% stake in its Joint
Venture with RML for the Benga coking coal project in Mozambique, which
is due to commence operations by end CY2011 – with offtake rights for
40% of the output from this project. Benga currently has coal resources of
4 bn tons and reserves of 502 mn tons.
Implications
We highlight the following: (1) Tata will continue to have its strategic
interest of rights to 40% offtake secured through its holding in the Benga
project in an increasingly tight global coking coal market, (2)
monetization of a successful investment (2X in under 3 years), which in
our view was not being ascribed any value by the market; and (3) it will
boost the cash pile and book value by about Rs 52/share and reduces net
debt from US$ 10.4bn at end March 2011 to US$ 9.3bn, which can then be
deployed to fund various growth projects.
Valuation
Pending completion of the transaction, we do not factor this in our
estimates. At 5.1x EV/EBITDA, the stock is trading at 18% discount to its
mid-cycle of 6.2X and looks attractively valued. We reiterate our Buy rating
(on CL) with P/B based 12-m target price of Rs774, implying 40% potential
upside. We introduce 3/14E EPS of Rs112.82.
Key risks
Weaker demand, margin squeeze from cost inflation and delays in growth
projects.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutra
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