JPMorgan:: Tata Steel - Balance Sheet and Cash Flow Analysis- Corus P&L has improved but the other two are some time away

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Tata Steel Ltd Overweight
TISC.BO, TATA IN
Balance Sheet and Cash Flow Analysis- Corus P&L
has improved but the other two are some time away


 Corus P&L has improved, but CF and BS still some time away: TATA
Europe profitability has improved with capacity shutdowns and a focus on
value added steels (70% of FY11 prod rolled into HR and as per the FY11 AR),
and reported a net profit of Rs16.6bn (admittedly helped by the Teesside asset
sale gain, without which it would have been loss making) vs. a loss of Rs75bn
in FY10. Employee costs at Europe declined 12% y/y to $2.6bn. However, this
is yet to flow through to the CF and BS. While there was no increase in equity
investment from India operations, there was an increase in Loans and
Advances in the India standalone entity of $2.2bn, which is attributed as
‘advance to Tata Steel Holdings and Centennial Steel’ (subsidiary
implementing the 2.9MT expansion). We believe most of this is likely the
former as the latter’s assets stood at $0.8bn.
 Working capital hurts: In our view, the additional support is driven by sharply
higher working capital (WC) requirements as Europe moves to business as
usual. WC increased by $1.6bn at Europe in FY11. While higher raw material
prices would keep WC elevated, capacity re-structuring in Europe should
provide some relief.
 Journey from FY07-11: Analyzing the cash flow of TATA over the last five
years, TATA India generated $8bn in OCF, while at the consolidated level OCF
stood at $11.4bn, of which total capex stood at $8bn. Net debt increased by
$9.6bn, equity raised stood at $4.2bn over the same time frame. Over the last
three years, since the crisis started, TATA India has reported ~$4.3bn as
‘Purchase of Investments in Subsidiaries/ICD/Shareholder Loan)’ which, in our
view, is a mix of investments in TATA Europe and Centennial Steel.
 Capex comments: In the AR, TATA has indicated Jan-2014 for the first phase
of 3MT and Mar-2015 for the next 3 MT in Orissa, implying that a large part of
the spending would essentially be geared toward creating infrastructure toward a
6MT capacity. TATA had guided to capex of $7.8bn and the above time lines
mean the spending should broadly take place over the next five years (FY12-
16E) and implies ~$1.4bn per year on the above project, though spending would
likely pick up only in the later years. Interestingly, there is no mention yet of
iron ore sourcing, with TATA mentioning that its application for iron ore is
awaiting government approval. Net debt as of March-11 stood at $10.7bn (we
take Hybrid as debt instrument), which should further come down post the
recent asset sales of ~1.1bn.