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UBS Investment Research
Tata Steel Ltd.
1 QFY12 results ahead of estimates
Event: 1Q Beat due to higher EBITDA; PAT driven by one-off gains
Consolidated pre-ex PAT of Rs14.7bn (-12%QoQ, -21%YoY) was higher than
UBS-e of Rs11.2bn due to higher EBITDA (Rs42.6bn,+18% QoQ, +0%YoY) in
both India/Corus. Net Sales of Rs328.4bn was in line. Reported PAT of 53.5bn
included Rs39bn in one-off gains. Corus’ EBITDA/t at US$78/t was higher (UBSe,
US$31/t) due to higher ASP of US$1,313/t (+10%QoQ) while EBITDA/t in
India at US$422/t was higher (UBS-e, US$387/t) due to lower raw material costs
Impact: 2QFY12E to be impacted by higher coking coal /lower steel prices
We believe though 1Q results were ahead of estimates, 2Q is likely to be subdued
due to full impact of higher coking coal/lower steel prices. Tata Steel today 1)
marginally increased capex guidance for FY12/13 from US$2bn each to US$2.2-
2.5bn each due to faster progress on Odisha project. 2) Commissioning of 2.9mt
expansion in Jamshedpur is delayed to 4QFY12 from 3QFY12. There is some
downside to our volume est of 7.2/9.5mt for FY12/13 (co. indicated 6.6/9.2mt). 3)
However, coking coal shipment from Mozambique is on track by FY12end
Action: Stock at attractive levels post correction due to Eurozone concerns
We believe earnings growth for Tata Steel will be supported by: 1) 43% capacity
expansion in highly profitable Indian operations by FY12end, 2) partial backward
integration in Corus by FY 13 (from 0% in coal /iron ore to 10%/18%)
Valuation: Maintain Buy and PT of Rs860
We continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
Europe at 6x and others at 6.5x EV/EBITDA on normalized EBITDA (FY12-13E).
Reported PAT was Rs53.5bn which included exceptional income of Rs39bn
which included:
— Rs28.8bn on account of profit on sale of Tata Steel’s stake in Riversdale:
There will be no capital gains tax as the stake was held by Tata Steel
Global Minerals Holding Pte (100% sub of Tata Steel Ltd) which is
registered in Singapore (where there is no capital gains tax). Tata Steel
sold its 26.27% stake in Riversdale Mining Ltd for A$1.06bn (US$1.1bn)
in June 2011.
— Rs4.4bn on account of profit on stake sale in Tata Refractories – which
attracted 10% capital gains tax.
— Rs5.97bn relating to the arbitration settlement with the TCP consortium –
there is no tax on this due to the carry forward losses.
Pre-ex PAT of Rs14.7 (-12%QoQ, -21%YoY) was ahead of UBS-e of Rs
11.2bn.
Consolidated EBITDA at Rs42.6bn (+18% QoQ, +0%YoY) came in ahead
of UBS-e/consensus at Rs33bn/ Rs39.7bn. The surprise in EBITDA came
from higher than expected EBITDA both in Indian and European businesses.
Net sales of Rs328.4bn (-2%QoQ, +22%YoY) was in line with UBS-e of
Rs330bn.
Reported PAT at Rs22.2bn included exceptional income of Rs5bn on
account of sale of stake in Tata Refractories to Krosaki Harima Corporation.
Pre-ex PAT at Rs17.6bn (-4%QoQ, +11%YoY) was higher than UBS-e of
Rs15.3bn driven by higher EBITDA (Rs30.4bn vs UBS-e Rs27.8bn) and
lower than expected interest expenses.
EBITDA was higher than UBS-e led by lower than expected raw material
expenses. EBITDA/t was US$422/t vs UBS-e of US$387/t
Net Sales at Rs77.9bn, (-5%QoQ, +20%YoY) was marginally lower than
UBS-e of Rs78.5bn (but higher than consensus of Rs76.6bn) driven by lower
ferro alloys sales. Net steel ASP of Rs45,631/t (+3%QoQ, +6%YoY) was in
line with estimates.
Despite higher power costs, the overall EBITDA/t at US$422/t (Rs18,969/t)
is ahead of our estimates due to lower than expected raw material costs part
of which was driven by lower soft coking coal and pulverized coal prices.
Power costs were higher because of rate revisions. Tata Steel India buys
c80% of its power from Tata Power.
Steel business ASP at Rs45,631/t was marginally lower than our estimate,
while volumes were exactly in-line at 1.6mt
Volumes in the European business were lower at 3.5mt due to soft demand
(marginally higher than our estimate of 3.4mt).
Reported EBITDA at US$427m included TCP arbitration final settlement
credit of US$153m.
Adj EBITDA/t of US$78/t was ahead of our expectation of US$31/t
primarily due to higher ASP at US$1,313/t and higher volumes.
The volume, topline and operating margins of the South Asian business were
largely on expected lines.
Conference call Takeaways
Outlook
The outlook for European business for the next 6 months is uncertain
primarily due to the economic conditions prevailing there.
Though management in the call said that steel demand in India is stable
despite monetary tightening, Indian steel demand grew by mere c1% for the
Apr-Jul’11 period according to JPC data. However, management reiterated
that they haven’t witnessed a slowdown in demand. Construction demand is
strong while, auto demand from consumer segment was soft. Management
expects India Steel demand for FY12 to grow by at least 9-10% which we
believe looks unrealistic given the current demand statistics. As far as Tata
Steel is concerned, the demand prospects would be better than overall Indian
demand due to its better product mix (value added, specialty etc).
Management expects steel prices to be flat to marginally lower over the
coming months – longs should be strong, while flat prices could be on the
softer side.
2.9mtpa Jamshedpur expansion & other projects
Tata Steel’s 2.9 mtpa expansion would be commissioned by the end of FY12
and would be ramped up in Q1FY13. This is delay of c1 quarter from the
earlier guidance. Hence, full extent of the expansion would start getting
reflected from Q2FY13. Management had ruled out any incremental
production from the 2.9mt expansion in FY12 and expect steel sales of
c6.6mt. Tata Steel is expecting 9-9.2 of saleable steel sale in FY13.
Construction activity at the Phase1 of 6mtpa Orissa project is in progress –
raft casting is being prepared in the blast furnace area. Mozambique coal
project will be operational by FY12.
Capex
The capex guidance for FY12/FY13 is US$2.2-2.5 bn (US$1.7-1.8bn in the
Indian operations and US$500-600m in Europe). This is higher than earlier
guidance of US$2bn as Tata Steel has been able to fast track capex in Odisha
project. We assume US$2bn in our current estimates for FY12/13. Given
increase in capex estimates our net debt estimates by FY12/13 end could
increase by US$0.5/1bn respectively (assuming they spend at the higher of
their guidance).
Management clarifies that it would stick to its strategy of non-core asset
sales which it began 18 months back.
Earnings
While there is downside to our volume estimates for India – we assume
7.2/9.5mt for FY12/13 (management today indicated 6.6/9.2mt) we believe
our EBITDA estimates are conservative at US$338/343 per tonne for Indian
business in FY12/13 while at US$50/65 per tonne for Corus in FY12/13.
US$65/per tonne in Corus in FY13 includes the benefit from integration of
iron ore/coking coal.
Tata Steel Ltd.
Established in 1907, Tata Steel, the Tata Group's flagship company, is the
world's sixth largest steel company with presence in 50 countries and crude steel
production capacity of 30mtpa, following the acquisition of Corus Group in
2007. It plans to increase production capacity in its Jamshedpur plant, one of the
world's most modern steel making and finishing facilities, from 6.8mtpa to
10mtpa by 2010. Tata Steel has captive iron ore and coal mines. It has plans for
greenfield expansion in Jharkhand, Orissa and Chhattisgarh.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations, based on global
and domestic steel prices and the prices of key raw materials such as coking coal
which are difficult to predict. Tata Steel’s backward integration for key raw
materials such as iron ore and downstream expansion into value added products
would only partly mitigate the impact of these variables.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Steel Ltd.
1 QFY12 results ahead of estimates
Event: 1Q Beat due to higher EBITDA; PAT driven by one-off gains
Consolidated pre-ex PAT of Rs14.7bn (-12%QoQ, -21%YoY) was higher than
UBS-e of Rs11.2bn due to higher EBITDA (Rs42.6bn,+18% QoQ, +0%YoY) in
both India/Corus. Net Sales of Rs328.4bn was in line. Reported PAT of 53.5bn
included Rs39bn in one-off gains. Corus’ EBITDA/t at US$78/t was higher (UBSe,
US$31/t) due to higher ASP of US$1,313/t (+10%QoQ) while EBITDA/t in
India at US$422/t was higher (UBS-e, US$387/t) due to lower raw material costs
Impact: 2QFY12E to be impacted by higher coking coal /lower steel prices
We believe though 1Q results were ahead of estimates, 2Q is likely to be subdued
due to full impact of higher coking coal/lower steel prices. Tata Steel today 1)
marginally increased capex guidance for FY12/13 from US$2bn each to US$2.2-
2.5bn each due to faster progress on Odisha project. 2) Commissioning of 2.9mt
expansion in Jamshedpur is delayed to 4QFY12 from 3QFY12. There is some
downside to our volume est of 7.2/9.5mt for FY12/13 (co. indicated 6.6/9.2mt). 3)
However, coking coal shipment from Mozambique is on track by FY12end
Action: Stock at attractive levels post correction due to Eurozone concerns
We believe earnings growth for Tata Steel will be supported by: 1) 43% capacity
expansion in highly profitable Indian operations by FY12end, 2) partial backward
integration in Corus by FY 13 (from 0% in coal /iron ore to 10%/18%)
Valuation: Maintain Buy and PT of Rs860
We continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
Europe at 6x and others at 6.5x EV/EBITDA on normalized EBITDA (FY12-13E).
Reported PAT was Rs53.5bn which included exceptional income of Rs39bn
which included:
— Rs28.8bn on account of profit on sale of Tata Steel’s stake in Riversdale:
There will be no capital gains tax as the stake was held by Tata Steel
Global Minerals Holding Pte (100% sub of Tata Steel Ltd) which is
registered in Singapore (where there is no capital gains tax). Tata Steel
sold its 26.27% stake in Riversdale Mining Ltd for A$1.06bn (US$1.1bn)
in June 2011.
— Rs4.4bn on account of profit on stake sale in Tata Refractories – which
attracted 10% capital gains tax.
— Rs5.97bn relating to the arbitration settlement with the TCP consortium –
there is no tax on this due to the carry forward losses.
Pre-ex PAT of Rs14.7 (-12%QoQ, -21%YoY) was ahead of UBS-e of Rs
11.2bn.
Consolidated EBITDA at Rs42.6bn (+18% QoQ, +0%YoY) came in ahead
of UBS-e/consensus at Rs33bn/ Rs39.7bn. The surprise in EBITDA came
from higher than expected EBITDA both in Indian and European businesses.
Net sales of Rs328.4bn (-2%QoQ, +22%YoY) was in line with UBS-e of
Rs330bn.
Reported PAT at Rs22.2bn included exceptional income of Rs5bn on
account of sale of stake in Tata Refractories to Krosaki Harima Corporation.
Pre-ex PAT at Rs17.6bn (-4%QoQ, +11%YoY) was higher than UBS-e of
Rs15.3bn driven by higher EBITDA (Rs30.4bn vs UBS-e Rs27.8bn) and
lower than expected interest expenses.
EBITDA was higher than UBS-e led by lower than expected raw material
expenses. EBITDA/t was US$422/t vs UBS-e of US$387/t
Net Sales at Rs77.9bn, (-5%QoQ, +20%YoY) was marginally lower than
UBS-e of Rs78.5bn (but higher than consensus of Rs76.6bn) driven by lower
ferro alloys sales. Net steel ASP of Rs45,631/t (+3%QoQ, +6%YoY) was in
line with estimates.
Despite higher power costs, the overall EBITDA/t at US$422/t (Rs18,969/t)
is ahead of our estimates due to lower than expected raw material costs part
of which was driven by lower soft coking coal and pulverized coal prices.
Power costs were higher because of rate revisions. Tata Steel India buys
c80% of its power from Tata Power.
Steel business ASP at Rs45,631/t was marginally lower than our estimate,
while volumes were exactly in-line at 1.6mt
Volumes in the European business were lower at 3.5mt due to soft demand
(marginally higher than our estimate of 3.4mt).
Reported EBITDA at US$427m included TCP arbitration final settlement
credit of US$153m.
Adj EBITDA/t of US$78/t was ahead of our expectation of US$31/t
primarily due to higher ASP at US$1,313/t and higher volumes.
The volume, topline and operating margins of the South Asian business were
largely on expected lines.
Conference call Takeaways
Outlook
The outlook for European business for the next 6 months is uncertain
primarily due to the economic conditions prevailing there.
Though management in the call said that steel demand in India is stable
despite monetary tightening, Indian steel demand grew by mere c1% for the
Apr-Jul’11 period according to JPC data. However, management reiterated
that they haven’t witnessed a slowdown in demand. Construction demand is
strong while, auto demand from consumer segment was soft. Management
expects India Steel demand for FY12 to grow by at least 9-10% which we
believe looks unrealistic given the current demand statistics. As far as Tata
Steel is concerned, the demand prospects would be better than overall Indian
demand due to its better product mix (value added, specialty etc).
Management expects steel prices to be flat to marginally lower over the
coming months – longs should be strong, while flat prices could be on the
softer side.
2.9mtpa Jamshedpur expansion & other projects
Tata Steel’s 2.9 mtpa expansion would be commissioned by the end of FY12
and would be ramped up in Q1FY13. This is delay of c1 quarter from the
earlier guidance. Hence, full extent of the expansion would start getting
reflected from Q2FY13. Management had ruled out any incremental
production from the 2.9mt expansion in FY12 and expect steel sales of
c6.6mt. Tata Steel is expecting 9-9.2 of saleable steel sale in FY13.
Construction activity at the Phase1 of 6mtpa Orissa project is in progress –
raft casting is being prepared in the blast furnace area. Mozambique coal
project will be operational by FY12.
Capex
The capex guidance for FY12/FY13 is US$2.2-2.5 bn (US$1.7-1.8bn in the
Indian operations and US$500-600m in Europe). This is higher than earlier
guidance of US$2bn as Tata Steel has been able to fast track capex in Odisha
project. We assume US$2bn in our current estimates for FY12/13. Given
increase in capex estimates our net debt estimates by FY12/13 end could
increase by US$0.5/1bn respectively (assuming they spend at the higher of
their guidance).
Management clarifies that it would stick to its strategy of non-core asset
sales which it began 18 months back.
Earnings
While there is downside to our volume estimates for India – we assume
7.2/9.5mt for FY12/13 (management today indicated 6.6/9.2mt) we believe
our EBITDA estimates are conservative at US$338/343 per tonne for Indian
business in FY12/13 while at US$50/65 per tonne for Corus in FY12/13.
US$65/per tonne in Corus in FY13 includes the benefit from integration of
iron ore/coking coal.
Tata Steel Ltd.
Established in 1907, Tata Steel, the Tata Group's flagship company, is the
world's sixth largest steel company with presence in 50 countries and crude steel
production capacity of 30mtpa, following the acquisition of Corus Group in
2007. It plans to increase production capacity in its Jamshedpur plant, one of the
world's most modern steel making and finishing facilities, from 6.8mtpa to
10mtpa by 2010. Tata Steel has captive iron ore and coal mines. It has plans for
greenfield expansion in Jharkhand, Orissa and Chhattisgarh.
Statement of Risk
Our earnings estimates and valuation are subject to fluctuations, based on global
and domestic steel prices and the prices of key raw materials such as coking coal
which are difficult to predict. Tata Steel’s backward integration for key raw
materials such as iron ore and downstream expansion into value added products
would only partly mitigate the impact of these variables.
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