Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Ltd Overweight
TISC.BO, TATA IN
Multiple Positive Drivers falling in place for H2FY12E;
Re-iterate OW
High-margin India expansion by Dec-11, continued high elevated iron ore
prices (which aid India profitability), long product exposure in India, and
reduction in net debt post the recent asset sales (c.$1.7bn) positions TATA
attractively for a meaningful re-rating in H2FY12E, in our view. We view
current levels as a good entry point for an H2FY12E rebound as catalysts play
out.
Global Steel- Stronger scrap and long product prices driven by China and
Japan: JPM European steel analyst Alessandro Abate (
highlights that reconstruction demand in Japan and social housing in China are
likely to lead to lower exports out of China and Japan in long steel, while scrap
imports by China would increase while scrap exports from Japan are likely to
decline. A pick up in RM costs, low inventory and IP rebound should drive a
steel price recovery by Q4 CY11. While Q2-Q3FY12E are likely to be weak
quarters as the ASP-RM mis-match is against Tata Steel Europe, given a) restructuring
in Europe and b) price recovery in Q4CY11E, we expect
$0.8/$1.05bn European EBITDA for FY12/13E.
Stronger iron ore prices positive for TATA India: Domestic steel demand is
likely to remain depressed in the near term. However, continued high spot iron
ore prices (click here for report) is positive for TATA India’s profitability (we
increase India Steel EBITDA/MT to $376$/314/MT for FY12/13E). High spot
thermal coal, scrap and iron ore prices are likely to lead to continued elevated
DRI prices, which should in turn lead to continued higher long product prices
(~3MT TATA India sales).
Leverage- Expect headline net debt to come off from $10.4bn of March-11.
The recent asset sales (Riversdale, Teeside), combined with working capital
pressures easing off, should result in net debt declining from March-11 levels
(we expect $9.7bn, March-12E). Orissa project capex is likely to pick up pace
once the Jamshedpur expansion spending declines, and thus a material pick up
in leverage would only be driven by any ‘corporate activity' .
India expansion by Dec-11, another positive: The high-margin India capacity
commissioning by Dec-11E in our view would allow investors to start
discounting FY13E earnings (trades at 6.2x FY13E P/E). Key risks remain a
sharp decline in spot iron ore prices. We adjust our India multiple down by 4%
to adjust for the Mining bill overhang (worst case EPS impact 7%).
Price target and valuation analysis
Our Jun-12 PT of Rs785 is based on sum of the parts based on FY13E
estimates. We lower our valuation multiple for the India operations to
6.3x, but maintain Asia at 5x and European operations at 5x FY13E
EBITDA.
Aside from generic risks of steel prices, steel demand and the proposed
Indian mining bill, the company specific risks for TATA are as follows:
a) Large deficit in pensions in Europe
b) Sharp decline in spot iron ore prices as it could erode India
profitability
c) Delay in India capacity commissioning
Multiple drivers falling in place for H2FY12E
We believe TATA faces multiple tailwinds driven by an improving macro and
company specific issues. Current valuations at (4.9x FY13E EV/EBITDA) do not
factor in this, in our view, and provide a good entry point.
The key drivers for a H2 re-rating are as follows:
a) Global steel price recovery led by higher scrap and long product prices:
JPM European steel analyst Alessandro Abate highlights that increase in
long product demand in China and Japan, higher scrap prices and IP up tick
should drive steel prices higher. This would be positive for Tata's European
and India operations.
b) Iron ore- Short term gets better, while supply getting pushed out: JPM
Global iron ore team led by Rodolfo De Angele have increased spot iron ore
forecasts over the next few quarters as demand remains strong, while supply
continues to lag. We expect iron ore prices to average $175/MT over
H2CY11E and 2012-13E. In the short term, Rodolfo believes demand
remains strong with Chinese steel production remaining at elevated levels,
while there are delays on the supply side. Higher steel prices driven by
higher raw material prices are positive for TATA India, given captive raw
materials.
c) India- tough market, but long product prices likely to remain elevated:
Indian steel demand remains depressed, given weakness in flat steel
demand, where significant capacity addition is on the way. However,
continued high spot iron ore prices, scrap prices and thermal coal prices
have pushed up DRI prices which should flow through long product prices.
TATA India has meaningful long product exposure (3MT).
d) India expansion by Dec-11E would allow investors to discount FY13E
earnings: The ~3MT India expansion is high margin even in the current
depressed Indian steel market given that it is backed by 100% captive iron
ore and 50% captive coking coal, which gives it a significant cost
advantage. We expect commissioning by Dec-11E, which would allow
investors to discount FY13E earnings when the full flow through of the
India expansion kicks in.
e) Leverage- Recent asset sales should reduce leverage: Recent asset sales
(Riversdale, Teeside) should aid in net debt reduction from March-11 levels
of $10.4bn. Orissa capex surge is likely only post decline in Jamshedpur
capex. We expect March-12E net debt at $9.7bn. While meaningful asset
sales from here are unlikely, we believe continued strong iron ore prices
should lead to elevated cash flows from India operations
f) Valuations remain attractive: At 5.8x/4.9x FY12/13E EV/EBITDA
TATA in our view, is not pricing in the above improvements.
Incorporating Annual Report
We incorporate the FY11 Annual Report, recent asset sales, and our updated raw
material forecasts. We increase our FY12E EPS by 6% and lower our FY13E EPS by
3%. We adjust for the proposed mining bill by lowering our India multiple to 6.3x
from 6.5x (4%) given the uncertainty from the royalty provisions. Worst case EPS
impact for TATA is 7%, in our view.
What are the key risks?
Aside from generic risks of steel prices, steel demand and the proposed Indian
mining bill, the company specific risks for TATA are as follows:
a) Large deficit in pensions in Europe
b) Sharp decline in spot iron ore prices as it could erode India profitability
c) Delay in India capacity commissioning
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Ltd Overweight
TISC.BO, TATA IN
Multiple Positive Drivers falling in place for H2FY12E;
Re-iterate OW
High-margin India expansion by Dec-11, continued high elevated iron ore
prices (which aid India profitability), long product exposure in India, and
reduction in net debt post the recent asset sales (c.$1.7bn) positions TATA
attractively for a meaningful re-rating in H2FY12E, in our view. We view
current levels as a good entry point for an H2FY12E rebound as catalysts play
out.
Global Steel- Stronger scrap and long product prices driven by China and
Japan: JPM European steel analyst Alessandro Abate (
highlights that reconstruction demand in Japan and social housing in China are
likely to lead to lower exports out of China and Japan in long steel, while scrap
imports by China would increase while scrap exports from Japan are likely to
decline. A pick up in RM costs, low inventory and IP rebound should drive a
steel price recovery by Q4 CY11. While Q2-Q3FY12E are likely to be weak
quarters as the ASP-RM mis-match is against Tata Steel Europe, given a) restructuring
in Europe and b) price recovery in Q4CY11E, we expect
$0.8/$1.05bn European EBITDA for FY12/13E.
Stronger iron ore prices positive for TATA India: Domestic steel demand is
likely to remain depressed in the near term. However, continued high spot iron
ore prices (click here for report) is positive for TATA India’s profitability (we
increase India Steel EBITDA/MT to $376$/314/MT for FY12/13E). High spot
thermal coal, scrap and iron ore prices are likely to lead to continued elevated
DRI prices, which should in turn lead to continued higher long product prices
(~3MT TATA India sales).
Leverage- Expect headline net debt to come off from $10.4bn of March-11.
The recent asset sales (Riversdale, Teeside), combined with working capital
pressures easing off, should result in net debt declining from March-11 levels
(we expect $9.7bn, March-12E). Orissa project capex is likely to pick up pace
once the Jamshedpur expansion spending declines, and thus a material pick up
in leverage would only be driven by any ‘corporate activity' .
India expansion by Dec-11, another positive: The high-margin India capacity
commissioning by Dec-11E in our view would allow investors to start
discounting FY13E earnings (trades at 6.2x FY13E P/E). Key risks remain a
sharp decline in spot iron ore prices. We adjust our India multiple down by 4%
to adjust for the Mining bill overhang (worst case EPS impact 7%).
Price target and valuation analysis
Our Jun-12 PT of Rs785 is based on sum of the parts based on FY13E
estimates. We lower our valuation multiple for the India operations to
6.3x, but maintain Asia at 5x and European operations at 5x FY13E
EBITDA.
Aside from generic risks of steel prices, steel demand and the proposed
Indian mining bill, the company specific risks for TATA are as follows:
a) Large deficit in pensions in Europe
b) Sharp decline in spot iron ore prices as it could erode India
profitability
c) Delay in India capacity commissioning
Multiple drivers falling in place for H2FY12E
We believe TATA faces multiple tailwinds driven by an improving macro and
company specific issues. Current valuations at (4.9x FY13E EV/EBITDA) do not
factor in this, in our view, and provide a good entry point.
The key drivers for a H2 re-rating are as follows:
a) Global steel price recovery led by higher scrap and long product prices:
JPM European steel analyst Alessandro Abate highlights that increase in
long product demand in China and Japan, higher scrap prices and IP up tick
should drive steel prices higher. This would be positive for Tata's European
and India operations.
b) Iron ore- Short term gets better, while supply getting pushed out: JPM
Global iron ore team led by Rodolfo De Angele have increased spot iron ore
forecasts over the next few quarters as demand remains strong, while supply
continues to lag. We expect iron ore prices to average $175/MT over
H2CY11E and 2012-13E. In the short term, Rodolfo believes demand
remains strong with Chinese steel production remaining at elevated levels,
while there are delays on the supply side. Higher steel prices driven by
higher raw material prices are positive for TATA India, given captive raw
materials.
c) India- tough market, but long product prices likely to remain elevated:
Indian steel demand remains depressed, given weakness in flat steel
demand, where significant capacity addition is on the way. However,
continued high spot iron ore prices, scrap prices and thermal coal prices
have pushed up DRI prices which should flow through long product prices.
TATA India has meaningful long product exposure (3MT).
d) India expansion by Dec-11E would allow investors to discount FY13E
earnings: The ~3MT India expansion is high margin even in the current
depressed Indian steel market given that it is backed by 100% captive iron
ore and 50% captive coking coal, which gives it a significant cost
advantage. We expect commissioning by Dec-11E, which would allow
investors to discount FY13E earnings when the full flow through of the
India expansion kicks in.
e) Leverage- Recent asset sales should reduce leverage: Recent asset sales
(Riversdale, Teeside) should aid in net debt reduction from March-11 levels
of $10.4bn. Orissa capex surge is likely only post decline in Jamshedpur
capex. We expect March-12E net debt at $9.7bn. While meaningful asset
sales from here are unlikely, we believe continued strong iron ore prices
should lead to elevated cash flows from India operations
f) Valuations remain attractive: At 5.8x/4.9x FY12/13E EV/EBITDA
TATA in our view, is not pricing in the above improvements.
Incorporating Annual Report
We incorporate the FY11 Annual Report, recent asset sales, and our updated raw
material forecasts. We increase our FY12E EPS by 6% and lower our FY13E EPS by
3%. We adjust for the proposed mining bill by lowering our India multiple to 6.3x
from 6.5x (4%) given the uncertainty from the royalty provisions. Worst case EPS
impact for TATA is 7%, in our view.
What are the key risks?
Aside from generic risks of steel prices, steel demand and the proposed Indian
mining bill, the company specific risks for TATA are as follows:
a) Large deficit in pensions in Europe
b) Sharp decline in spot iron ore prices as it could erode India profitability
c) Delay in India capacity commissioning
No comments:
Post a Comment