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UBS Investment Research
Tata Steel Ltd.
F avourable risk reward at current levels
Event: near-term catalysts-domestic capacity expansion; Corus integration
We believe near-term catalysts for Tata Steel are: 1) capacity expansion in its
profitable Indian capacity by c40% (from 6.9mt to 9.7mt) by December 2011. Tata
Steel’s Indian operations are one of the most profitable globally (Q4 FY11
EBITDA/t of cUS$402/t); and 2) partial backward integration in Corus—to source
coal/iron ore from the Riversdale/Canadian JV from FY13 (increasing integration
from 0% to 10%/18% on coal/iron ore).
Impact: strong earnings growth to be reflected in FY13
We believe the Indian expansion and European integration would boost earnings,
generating an EBITDA/PAT growth of 36%/58% in FY13 over FY12, despite our
very conservative EBITDA/t estimates for FY12/13 of US$340/345/t (generated
EBITDA/t of US$402/t in Q4 FY11) for the Indian business and US$50/65/t for
the European business, which is lower than management guidance.
Action: attractive after YTD underperformance—Buy
YTD Tata Steel underperformed the NIFTY/Sensex/MSCI India by 8.7%/8.5%/9%
largely on concerns on increasing raw material costs and recently on Eurozone
concerns. It is our preferred pick in the Indian steel space with a forecast upside of
c42%. We see it as attractive trading at 7.1x FY12E/5.2x FY13E EV/EBITDA and
9.3x FY12E/5.9x FY13E PE, both below historical averages.
Valuation: maintain Buy and price target of Rs820
We continue to value Tata Steel on a sum-of-the-parts basis with the Indian
business at 7.4x, Europe at 6x, and others at 6.5x EV/EBITDA on normalised
EBITDA (FY12-13E).
Tata Steel Ltd.
Established in 1907, Tata Steel, the Tata Group's flagship company, is the
world's sixth largest steel company with presence in 50 countries and crude steel
production capacity of 30mtpa, following the acquisition of Corus Group in
2007. It plans to increase production capacity in its Jamshedpur plant, one of the
world's most modern steel making and finishing facilities, from 6.8mtpa to
10mtpa by 2010. Tata Steel has captive iron ore and coal mines. It has plans for
greenfield expansion in Jharkhand, Orissa and Chhattisgarh.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations, based on global
and domestic steel prices and the prices of key raw materials such as coking coal
which are difficult to predict. Tata Steel’s backward integration for key raw
materials such as iron ore and downstream expansion into value added products
would only partly mitigate the impact of these variables.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Steel Ltd.
F avourable risk reward at current levels
Event: near-term catalysts-domestic capacity expansion; Corus integration
We believe near-term catalysts for Tata Steel are: 1) capacity expansion in its
profitable Indian capacity by c40% (from 6.9mt to 9.7mt) by December 2011. Tata
Steel’s Indian operations are one of the most profitable globally (Q4 FY11
EBITDA/t of cUS$402/t); and 2) partial backward integration in Corus—to source
coal/iron ore from the Riversdale/Canadian JV from FY13 (increasing integration
from 0% to 10%/18% on coal/iron ore).
Impact: strong earnings growth to be reflected in FY13
We believe the Indian expansion and European integration would boost earnings,
generating an EBITDA/PAT growth of 36%/58% in FY13 over FY12, despite our
very conservative EBITDA/t estimates for FY12/13 of US$340/345/t (generated
EBITDA/t of US$402/t in Q4 FY11) for the Indian business and US$50/65/t for
the European business, which is lower than management guidance.
Action: attractive after YTD underperformance—Buy
YTD Tata Steel underperformed the NIFTY/Sensex/MSCI India by 8.7%/8.5%/9%
largely on concerns on increasing raw material costs and recently on Eurozone
concerns. It is our preferred pick in the Indian steel space with a forecast upside of
c42%. We see it as attractive trading at 7.1x FY12E/5.2x FY13E EV/EBITDA and
9.3x FY12E/5.9x FY13E PE, both below historical averages.
Valuation: maintain Buy and price target of Rs820
We continue to value Tata Steel on a sum-of-the-parts basis with the Indian
business at 7.4x, Europe at 6x, and others at 6.5x EV/EBITDA on normalised
EBITDA (FY12-13E).
Tata Steel Ltd.
Established in 1907, Tata Steel, the Tata Group's flagship company, is the
world's sixth largest steel company with presence in 50 countries and crude steel
production capacity of 30mtpa, following the acquisition of Corus Group in
2007. It plans to increase production capacity in its Jamshedpur plant, one of the
world's most modern steel making and finishing facilities, from 6.8mtpa to
10mtpa by 2010. Tata Steel has captive iron ore and coal mines. It has plans for
greenfield expansion in Jharkhand, Orissa and Chhattisgarh.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations, based on global
and domestic steel prices and the prices of key raw materials such as coking coal
which are difficult to predict. Tata Steel’s backward integration for key raw
materials such as iron ore and downstream expansion into value added products
would only partly mitigate the impact of these variables.
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