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What’s the theme?
We expect Tata Steel to undergo positive transformation led by : 1) Improving share of the highly profitable
integrated Indian operations (EBITDA/t of USD350+, one of the highest globally) with completion of 2.9mntpa
brownfield expansion at Jamshedpur in FY12; 2) Transformation steps taken at TSE (reduced headcount,
sale of TCP, downsizing at Scunthorpe) to improve profitability, 3) Improved capital structure: FY11 net
D/E of 1.0x - improved further to 0.76x following post proceeds from the TCP settlement and sale of
investment in Riversdale, Tata Refractories in Q1FY12; and 4) Hedging of high RM cost at TSE on
commencement of mining at Riversdale (2HFY12) and New Millennium (FY13). We find the stock attractively
valued at 4.7x FY12E EV/EBITDA.
What will move the stock?
1) Brownfield expansion of 2.9mntpa at Jamshedpur to increase share of the profitable Indian operations
(FY11 EBITDA/t of USD353 vs. consolidated USD138); 2) Improved capital structure with manageable
financial leverage (FY11 net D/E of 1.0x vs. 1.3x in FY10); 3) Progress in raw material integration at TSE;
4) Commencement of coal mining from Riversdale's Benga project, in which Tata Steel holds 35% stake
with 40% offtake rights; 5) Expected improvement in steel profitability as high raw material prices ease;
Where are we stacked versus consensus?
Our consolidated estimates are lower than the street. We value Tata Steel at Rs629 using SOTP
methodology.
What will challenge our target price?
1) Raw material prices remaining high, squeezing margin for the non-integrated operations of TSE resulting
in losses at the EBITDA level; 2) Delay in brownfield expansion; and 3) Delay in commencing mining at
Riversdale/ New Millennium.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s the theme?
We expect Tata Steel to undergo positive transformation led by : 1) Improving share of the highly profitable
integrated Indian operations (EBITDA/t of USD350+, one of the highest globally) with completion of 2.9mntpa
brownfield expansion at Jamshedpur in FY12; 2) Transformation steps taken at TSE (reduced headcount,
sale of TCP, downsizing at Scunthorpe) to improve profitability, 3) Improved capital structure: FY11 net
D/E of 1.0x - improved further to 0.76x following post proceeds from the TCP settlement and sale of
investment in Riversdale, Tata Refractories in Q1FY12; and 4) Hedging of high RM cost at TSE on
commencement of mining at Riversdale (2HFY12) and New Millennium (FY13). We find the stock attractively
valued at 4.7x FY12E EV/EBITDA.
What will move the stock?
1) Brownfield expansion of 2.9mntpa at Jamshedpur to increase share of the profitable Indian operations
(FY11 EBITDA/t of USD353 vs. consolidated USD138); 2) Improved capital structure with manageable
financial leverage (FY11 net D/E of 1.0x vs. 1.3x in FY10); 3) Progress in raw material integration at TSE;
4) Commencement of coal mining from Riversdale's Benga project, in which Tata Steel holds 35% stake
with 40% offtake rights; 5) Expected improvement in steel profitability as high raw material prices ease;
Where are we stacked versus consensus?
Our consolidated estimates are lower than the street. We value Tata Steel at Rs629 using SOTP
methodology.
What will challenge our target price?
1) Raw material prices remaining high, squeezing margin for the non-integrated operations of TSE resulting
in losses at the EBITDA level; 2) Delay in brownfield expansion; and 3) Delay in commencing mining at
Riversdale/ New Millennium.
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