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Tata Steel
Valuation Discord, Upcoming
Growth: Stay OW
What's Changed
Price Target Rs836.00 to Rs746.00
F12e, F13e EPS Down 14%, 13%
F14e EPS Introduced at Rs144
Biggest discord between value and stock price in our
Indian metals/mining coverage: We’ve trimmed our
price target 11%, to Rs746, but that still implies 33%
upside after 5% underperformance YTD vs. the Sensex.
F12e valuations look attractive: 1.2x P/B and 5.8x P/E (vs.
one-year-forward historical averages of 1.5x and 7x).
Expecting a hazy macroeconomic outlook, most
investors are ignoring Tata’s strong progress:
• Stepping up profitability: Corus is improving its cost
structure and lifting self-sufficiency in raw materials.
The proportion of Indian operations is rising.
• Bolstering its balance sheet: We project the net
debt/equity ratio to fall from 1.4x at F11 end to 0.8x
at F13 end. Internal accruals over F12-F13E should
be 192% of capex.
• Increasing capacity: Tata Steel is just six months
away from a 45% enhancement in its Indian
capacity (~68% of consolidated EBITDA in F13E)
and from the beginning of coal production in
Mozambique. After two previous additions to
capacity, the stock did quite well (up 56% and 71%
in 1HC05 and 1HCY09).
We expect attractive valuations to be recognized in
2HF12: The 3 mt steel project in India will be drawing
closer, as will the start of coking coal production at the
Benga project. We also expect steel prices to hold up
well. If the stock were to remain at current levels, in
February 2012 it would be reflecting a negative EV of
US$3.5b for the combined steel capacity of about 18 mt
in Europe and Asia-ex India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel
Valuation Discord, Upcoming
Growth: Stay OW
What's Changed
Price Target Rs836.00 to Rs746.00
F12e, F13e EPS Down 14%, 13%
F14e EPS Introduced at Rs144
Biggest discord between value and stock price in our
Indian metals/mining coverage: We’ve trimmed our
price target 11%, to Rs746, but that still implies 33%
upside after 5% underperformance YTD vs. the Sensex.
F12e valuations look attractive: 1.2x P/B and 5.8x P/E (vs.
one-year-forward historical averages of 1.5x and 7x).
Expecting a hazy macroeconomic outlook, most
investors are ignoring Tata’s strong progress:
• Stepping up profitability: Corus is improving its cost
structure and lifting self-sufficiency in raw materials.
The proportion of Indian operations is rising.
• Bolstering its balance sheet: We project the net
debt/equity ratio to fall from 1.4x at F11 end to 0.8x
at F13 end. Internal accruals over F12-F13E should
be 192% of capex.
• Increasing capacity: Tata Steel is just six months
away from a 45% enhancement in its Indian
capacity (~68% of consolidated EBITDA in F13E)
and from the beginning of coal production in
Mozambique. After two previous additions to
capacity, the stock did quite well (up 56% and 71%
in 1HC05 and 1HCY09).
We expect attractive valuations to be recognized in
2HF12: The 3 mt steel project in India will be drawing
closer, as will the start of coking coal production at the
Benga project. We also expect steel prices to hold up
well. If the stock were to remain at current levels, in
February 2012 it would be reflecting a negative EV of
US$3.5b for the combined steel capacity of about 18 mt
in Europe and Asia-ex India.
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