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Annual Report Analysis
The key highlight of Tata Steel’s FY11 annual report (AR) was the sharp
weakening of Corus’ working capital cycle, which has been funded by Tata
Steel India. Lower staff and power costs in Corus, though are positives. The
AR focuses on Corus’ new ‘One company’ operating model and the multiple
projects underway to improve margins. Commentary on the Jamshedpur
expansion, Orissa project and overseas mining projects is positive. We cut
FY12-13 EPS by 8-9% factoring in lower margins in Corus. Maintain BUY.
Sharp rise in receivables in Corus
In FY11, Corus’ receivables rose 32% to 73 days while inventories rose 17% to 81
days. The increase in working capital was funded by Tata Steel India via a loan of
Rs37bn to Global ProCo, which in turn purchased a part of Corus’ receivables.
Global ProCo is a 100% owned group procurement company providing
securitization support to Corus and has replaced an external securitization facility
in FY10, which partly explains the sharp rise in receivable days. As a result, consol
cash flow from operations declined sharply despite much higher profits. Free cash
also remained negative due to high capex of Rs110bn. Consol net D/E has
declined to 1.4x while BVPS has improved to Rs371.
Corus focused on improving profitability
Corus has adopted a new ‘One Company’ operating model, which has three
operational hubs fed by a single supply chain function. The aim here is to provide
seamless cross-facility service to customers via eight sectoral teams. During our
visit to Corus’ plants in Apr-11, we noticed that various units seem to be
operating in ‘silos’ and we believe that this initiative will yield rich dividends. In
addition, Corus is focusing on many cost/product mix measures to improve
margins. The re-financing of Corus’ debt with a relaxed repayment schedule and
financial covenants now allows Corus to invest more in remunerative capex.
Positive commentary on India projects
The AR reiterates timely commissioning of the Jamshedpur expansion by end-
FY12. There is a lot of focus on the Orissa Greenfield plant where a lot of initial
progress has been achieved. Tata is targeting commissioning of the 1st 3mtpa
phase by Jan-14 & the 2nd 3mtpa phase by Mar-15, which we view as aggressive.
Cutting FY12-13 EPS by 8-9%; maintain BUY
Steel prices globally (and more so in Europe) have not moved inline with raw
material price increases and we see more margin pressure for convertors like
Corus. We now factor in a lower EBITDA/t of US$51/US$56 for Corus in FY12/13
resulting in 8-9% cut in FY12-13 EPS. We still like Tata Steel given strong India
volume growth and start of production in mines over FY13-14. BUY stays.
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