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Cutting estimates/target price to factor weakening European steel market
Following downward revision to our Euroland economic growth forecasts
(2011/12 GDP growth revised down by 20/70bps), we are cutting our volume
estimates for TS Europe by 11% and 6%, respectively. We cut our FY12 EBITDA
for TS Europe by 30% to INR32bn. We remain more sanguine about Indian
operations where we have made only a modest downward adjustment of 2% to
our estimates. We cut our consolidated FY12 EBITDA estimate by 9% and EPS by
16%. We cut target price by 12.4% to INR620. Maintain Buy on valuation.
TS Europe trading at steep discount to European peers
Following fears of slowing demand and weakening steel prices in the western
world, Tata Steel stock is down by 17% over past two weeks. While we cannot
rule out any further stock price weakness if the panic selling in global equity
markets continues, we do believe that the stock weakness looks overdone with
the European operations trading at a residual valuation of only 1.9x FY12
EV/EBITDA, implying a ~67% discount to the corresponding valuation of Arcelor
Mittal (Hold; EUR16.06) and ~60% discount to Thyssen Krupp (Buy; EUR24.71).
Capacity expansions in India to incrementally de-risk earnings
The company’s vulnerability to a volatile steel environment and vagaries of raw
material prices has been progressively brought down through investments in
European operations and higher volume growth in India. Following the
commissioning of the 2.8mn tonne expansion at Jamshedpur, the company will be
able to de risk its earnings far more with Indian operations contributing 76-77% of
the consolidated EBITDA. We estimate that the normalized EBITDA/t of Indian
operations at US$375/t, ~2.5x of the normalized EBITDA of global peers.
Target price of INR620/share; reiterate Buy
We value Tata Steel on SOTP valuation: Indian/European/Asian ops valued at
FY12E EV/EBITDA of 7x/6x/4.5x. Key risks: delay in commissioning of projects in
India, and a higher than-anticipated rise in raw material prices
Downside risks
Higher-than-anticipated increase in steel-making raw material prices: In the case that
raw material price hikes are higher than our assumptions, there could be a risk to our
target price and recommendation.
Delay in commissioning of projects in India: The timely commissioning of India
projects remains critical to the de-risking of company’s earnings to the vagaries of the
volatile raw material price and also the finance management’s capital expenditure over
FY12-14 without putting undue stress on the balance sheet.
Overhang of the inflation-wary government of India: In the case that the inflation-wary
government of India frowns on the price hikes, the sentiment for all steel stocks,
including Tata Steel, may be affected negatively.
Steel demand environment remaining challenging in Europe, especially in the long
product segment into CY11 and delay in steel demand recovery.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cutting estimates/target price to factor weakening European steel market
Following downward revision to our Euroland economic growth forecasts
(2011/12 GDP growth revised down by 20/70bps), we are cutting our volume
estimates for TS Europe by 11% and 6%, respectively. We cut our FY12 EBITDA
for TS Europe by 30% to INR32bn. We remain more sanguine about Indian
operations where we have made only a modest downward adjustment of 2% to
our estimates. We cut our consolidated FY12 EBITDA estimate by 9% and EPS by
16%. We cut target price by 12.4% to INR620. Maintain Buy on valuation.
TS Europe trading at steep discount to European peers
Following fears of slowing demand and weakening steel prices in the western
world, Tata Steel stock is down by 17% over past two weeks. While we cannot
rule out any further stock price weakness if the panic selling in global equity
markets continues, we do believe that the stock weakness looks overdone with
the European operations trading at a residual valuation of only 1.9x FY12
EV/EBITDA, implying a ~67% discount to the corresponding valuation of Arcelor
Mittal (Hold; EUR16.06) and ~60% discount to Thyssen Krupp (Buy; EUR24.71).
Capacity expansions in India to incrementally de-risk earnings
The company’s vulnerability to a volatile steel environment and vagaries of raw
material prices has been progressively brought down through investments in
European operations and higher volume growth in India. Following the
commissioning of the 2.8mn tonne expansion at Jamshedpur, the company will be
able to de risk its earnings far more with Indian operations contributing 76-77% of
the consolidated EBITDA. We estimate that the normalized EBITDA/t of Indian
operations at US$375/t, ~2.5x of the normalized EBITDA of global peers.
Target price of INR620/share; reiterate Buy
We value Tata Steel on SOTP valuation: Indian/European/Asian ops valued at
FY12E EV/EBITDA of 7x/6x/4.5x. Key risks: delay in commissioning of projects in
India, and a higher than-anticipated rise in raw material prices
Downside risks
Higher-than-anticipated increase in steel-making raw material prices: In the case that
raw material price hikes are higher than our assumptions, there could be a risk to our
target price and recommendation.
Delay in commissioning of projects in India: The timely commissioning of India
projects remains critical to the de-risking of company’s earnings to the vagaries of the
volatile raw material price and also the finance management’s capital expenditure over
FY12-14 without putting undue stress on the balance sheet.
Overhang of the inflation-wary government of India: In the case that the inflation-wary
government of India frowns on the price hikes, the sentiment for all steel stocks,
including Tata Steel, may be affected negatively.
Steel demand environment remaining challenging in Europe, especially in the long
product segment into CY11 and delay in steel demand recovery.
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