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India Equity Research Reports, IPO and Stock News
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Macro risks rising but priced in
Tata Steel’s 1Q recurring net profit fell 22% YoY and was 16% below
estimates. Margins improved in India and Corus but will weaken from here
due to lower steel and higher RM prices. The key risk to our BUY call – another
bout of weakness in Europe – seems set to unfold due to which we cut FY12-
13 consol EPS by 26% factoring in lower volumes and margins in Corus. We
don’t expect the stock to visit the 2009 lows as it is much better placed now
from a risk profile, cost and balance sheet perspective. Our distress case
valuation for Tata is Rs372/sh assuming an acute global downturn, which is
not our base case. Maintain BUY with a revised target price of Rs615.
Margins rise in both India and Corus but will decline 2Q onwards
Tata’s 1Q EBITDA was flat YoY (inline with est.) but recurring net profit at
Rs14.7bn fell 22% YoY (16% below est.) due to lower other income and higher
interest and depreciation. Three one-time items resulted in reported net profit
coming in at a much higher Rs53.5bn. Both India and Corus saw the full benefit of
the early-2011 steel price rally which drove a QoQ margin expansion. With steel
prices having weakened and the impact of higher priced RM set to come through,
margins will slide in both India and Corus 2Q onwards. Consol net debt is down to
US$9.1bn in 1Q (US$10.5bn in 4Q), which is a positive.
Corus facing macro headwinds once again
Sovereign risk issues are worsening in Europe and the European economy seems
poised to slow down further. Management commentary was also negative and
mentioned that summer demand this year has softened more than before. We
now factor in a further slowdown in Europe (not an acute downturn) and cut our
FY12/FY13 Corus volumes by 3%/8% and EBITDA/t to US$39/US$31
(US$50/US$55 previously). This results in a 26% cut to our FY12-13 EPS.
Valuations are not likely to visit 2009-lows; maintain BUY
We believe that Tata is much better placed now than in 2008 given – 1) RM
contracts are aligned with steel contracts now, 2) Corus has cut fixed costs since
2008, 3) Share of India in volumes is much higher now, and 4) Consol net D/E is
much lower now with a significantly relaxed repayment schedule. As a result, we
don’t expect Tata’s stock to visit the 2009 valuation lows (0.3x trailing P/B). Our
distress case valuation for Tata Steel is Rs372 (20% downside), which assumes
zero enterprise value for Corus and just US$275 EBITDA/t for India. One would
need to be a believer in an acute global downturn to be negative on Tata post
recent correction. We see potential for strong absolute returns in Tata Steel once
the India expansion is commissioned and production starts in Mozambique
provided the slowdown in Europe is moderate and not acute. Retain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Macro risks rising but priced in
Tata Steel’s 1Q recurring net profit fell 22% YoY and was 16% below
estimates. Margins improved in India and Corus but will weaken from here
due to lower steel and higher RM prices. The key risk to our BUY call – another
bout of weakness in Europe – seems set to unfold due to which we cut FY12-
13 consol EPS by 26% factoring in lower volumes and margins in Corus. We
don’t expect the stock to visit the 2009 lows as it is much better placed now
from a risk profile, cost and balance sheet perspective. Our distress case
valuation for Tata is Rs372/sh assuming an acute global downturn, which is
not our base case. Maintain BUY with a revised target price of Rs615.
Margins rise in both India and Corus but will decline 2Q onwards
Tata’s 1Q EBITDA was flat YoY (inline with est.) but recurring net profit at
Rs14.7bn fell 22% YoY (16% below est.) due to lower other income and higher
interest and depreciation. Three one-time items resulted in reported net profit
coming in at a much higher Rs53.5bn. Both India and Corus saw the full benefit of
the early-2011 steel price rally which drove a QoQ margin expansion. With steel
prices having weakened and the impact of higher priced RM set to come through,
margins will slide in both India and Corus 2Q onwards. Consol net debt is down to
US$9.1bn in 1Q (US$10.5bn in 4Q), which is a positive.
Corus facing macro headwinds once again
Sovereign risk issues are worsening in Europe and the European economy seems
poised to slow down further. Management commentary was also negative and
mentioned that summer demand this year has softened more than before. We
now factor in a further slowdown in Europe (not an acute downturn) and cut our
FY12/FY13 Corus volumes by 3%/8% and EBITDA/t to US$39/US$31
(US$50/US$55 previously). This results in a 26% cut to our FY12-13 EPS.
Valuations are not likely to visit 2009-lows; maintain BUY
We believe that Tata is much better placed now than in 2008 given – 1) RM
contracts are aligned with steel contracts now, 2) Corus has cut fixed costs since
2008, 3) Share of India in volumes is much higher now, and 4) Consol net D/E is
much lower now with a significantly relaxed repayment schedule. As a result, we
don’t expect Tata’s stock to visit the 2009 valuation lows (0.3x trailing P/B). Our
distress case valuation for Tata Steel is Rs372 (20% downside), which assumes
zero enterprise value for Corus and just US$275 EBITDA/t for India. One would
need to be a believer in an acute global downturn to be negative on Tata post
recent correction. We see potential for strong absolute returns in Tata Steel once
the India expansion is commissioned and production starts in Mozambique
provided the slowdown in Europe is moderate and not acute. Retain BUY.
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