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UBS Investment Research
Tata Steel Ltd.
D owngrade to Neutral; Corus to be a drag
Event: Lower earnings led by Corus; lower volumes in India; higher capex
We downgrade Tata Steel to a Neutral as we lower earnings led by 1) Lower
EBITDA/T estimates in Corus from US$50/65 to US$22/23. 2) Lower sales
volumes in the Indian business in FY13 from 9.5mt to 7.9mt given the 2.9mt
Jamshedpur expansion will only be commissioned by Mar 12. 3) We also increase
capex estimates to US$2.5bn in FY12/13 each (from US$1.9bn earlier in each
year). We lower our EBITDA estimates by Rs27bn/Rs54bn (-20/-29%) and PAT
estimates by Rs22bn/Rs43bn (-41% /-51%) for FY12-13.
Impact: Earnings trajectory to decline; don’t expect recovery in Corus
(1) We estimate earnings/tonne have peaked out and earnings are likely to decline
going forward. We expect Tata Steel will generate breakeven EBITDA on Corus in
Q2FY12 (US$78/t in Q1) due to lower steel prices and higher raw material costs.
We expect EBITDA/t in Indian business to decline to US$375/t (from US$422/t in
Q1). (2) Given limited visibility in macro recovery in near-medium term in
Europe, we believe Corus will remain an overhang given its high financial leverage
and high cost structure.
Action: Downgrade to Neutral; Consensus earnings likely to come down
We expect Net Debt/EBITDA to increase from 3.8x to 4.6x in FY11-FY13 (net
debt of Rs467bn-Mar 2011). We are 41%/51% below consensus (76% buy
ratings).
Valuation: Lower price target to Rs460 given cut in earnings
We continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
No catalysts ahead
We believe Tata Steel’s stock price is not attractive at the current levels:
Declining earnings trajectory - We estimate earnings/t have peaked out and
earnings are likely to decline going forward. We expect Tata Steel will
generate breakeven EBITDA on Corus in Q2FY12 (US$78/t in Q1) due to
lower steel prices and higher raw material costs. We expect EBITDA/t in
Indian business to decline to US$375/t (from US$422/t in Q1).
Corus to remain an overhang - Given limited visibility in macro recovery in
near-medium term in Europe, we believe Corus will remain an overhang
given its high financial leverage and high cost structure.
We downgrade Tata Steel to a Neutral as we lower earnings led by
— Lower EBITDA/T estimates in Corus from US$50/65 to US$22/23.
— Lower sales volumes in the Indian business in FY13 from 9.5mt to 7.9mt
given the 2.9mt Jamshedpur expansion will only be commissioned by
Mar 12.
— We also increase capex estimates to US$2.5bn in FY12/13 each (from
US$1.9bn earlier in each year).
— We lower our EBITDA estimates by Rs27bn/Rs54bn (-20/-29%) and
PAT estimates by Rs22bn/Rs43bn (-41% /-51%) for FY12-13.
Valuations not attractive enough – Though Tata Steel has corrected it is still
trading at 6x FY13 EV/EBITDA and trading at FY13 P/B of 0.95x (and
1.48x adjusted for goodwill). Tata Steel is trading at 0.86x March 2013 P/B
vs ArcelorMittal which is trading at 0.4x Dec 2012 P/B on Bloomberg
consensus earnings.
We have lowered our EBITDA estimates by Rs27bn/Rs54bn and PAT estimates
for Tata Steel by Rs22bn/Rs43bn (-41% /-51%) for FY12-13 primarily led by:
(1) Lower earnings in Corus
— We lower EBITDA estimates by Rs19bn/29bn (-59%/-67%) led by lower
volumes and EBITDA/t estimates.
— We lower EBITDA/t estimates from US$50/65 in FY12/FY3 to
US$22/23/t. EBITDA in FY13 is now primarily from the integration
benefits from Riversdale (coking coal) and New Millenium Corporation
(iron ore).
— We assume 0.7mt of coking coal and 3mt of iron from Riversdale and
New Millenium Corporation respectively in FY13.
— There is a marked difference between the last financial crisis and the
current global weakness/slow down. The last financial crisis witnessed a
severe inventory de-stocking driven by a collapse/freeze in bank lending
post the Lehman collapse, leading to a sharp fall in demand and steel
prices. However, this time around our global economists see no such
possibility currently.
(2) Lower earnings for the Indian business:
— We lower EBITDA estimates by Rs4bn/Rs22bn and PAT estimates by
Rs0.4/Rs14bn in FY12/13.
— Key change in FY13 estimates – We lower EBITDA/PAT estimates by
16%/15% led by 16% reduction in volumes – from 9.5mt to 7.9mt
Valuation
We value Tata Steel on an SOTP basis with the Indian business at 7.4x, Europe
at 6x, and others at 6.5x EV/EBITDA on normalised EBITDA (FY12-13E). We
downgrade our rating to Neutral from Buy and lower our price target to Rs460
(from Rs860).
Table 6: Tata Steel’s SOTP based Valuation (new)
TS-Standalone TS-Europe Others
Target EV/EBITDA (x) 7.40 6.00 6.50
Target EBITDA (Normalised FY12-13) 115,284 13,534 4,575
Target EV 853,100 81,205 29,740
Total target EV 964,044
Net debt 523,810
Target Market cap 440,235
Final Target Price* 459
Source: UBS estimates *Rounded off to Rs860
Table 7: Tata Steel’s SOTP based Valuation (old)
Rs m TS-Standalone TS-Europe Others
Target EV/EBITDA (x) 7.40 6.00 6.50
Target EBITDA (Normalised FY12-13) 128,084 37,326 4,641
Target EV 947,821 223,955 30,164
Total target EV 1,201,940
Net debt July10 478,452
Target Market cap 723,487
Target price (Rs) 816*
Source: UBS estimates; *Rounded to Rs820
Is the British Steel Pension Scheme fully funded?
Tata Steel Europe has two major pension schemes i.e., The British Steel
Pension Scheme (BSPS) in the UK and the Stichting Pensioenfonds
Hoogovens (SPH) at the Netherlands where the members along with the
company contribute to meet the cost of future service benefits subject to
review at the future actuarial valuations.
As per Tata Steel, total pension assets as of 31st March 2011 for both BSPS
and SPH were GBP 16.1bn while for BSPS alone it was GBP 11.3bn.
As per FY11 Annual Report of Tata Steel, the market value of the net
pension assets substantially exceeds that of its liabilities - Tata Steel
recognized net assets (surplus) of Rs22,865m/15,324 m (US$508/340m) for
FY11/10 while BSPS (the trust managing Tata Steel’s UK pension scheme)
accounts show a deficit of Rs24,573m (US$546m) at the end of CY10; the
FY11 liability number is yet to be calculated by BSPS.
According to the management, Tata Steel’s pension asset status (stated in the
annual report) is approved by the auditors. The difference between Tata
Steel’s pension calculations and those of BSPS differ primarily from
difference in assumptions of mortality, discount rates, commuting of
pensioners etc.
Going by BSPS numbers, there is an unfunded pension liability of cGBP361
(US$550m) as of CY10 end. However, the management has clarified that
even if we go by BSPS’s unfunded pension figures of GBP361mn (CY10
end) it does not create a cash flow impact as Tata Steel does not have to fund
that deficit.
The sharp decline in European equities in the last 2 months is likely to have
an impact on the Pension Assets (as c27.5% of assets is invested in equities)
– though this would be partly setoff by the increase in value of bonds as
yields have declined in the last 2 months.
While this will not represent an immediate funding need, Tata Steel will have
to agree on a recovery plan outlining the basis and timelines on which the
scheme will be returned to a fully funded status.
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.
D owngrade to Neutral; Corus to be a drag
Event: Lower earnings led by Corus; lower volumes in India; higher capex
We downgrade Tata Steel to a Neutral as we lower earnings led by 1) Lower
EBITDA/T estimates in Corus from US$50/65 to US$22/23. 2) Lower sales
volumes in the Indian business in FY13 from 9.5mt to 7.9mt given the 2.9mt
Jamshedpur expansion will only be commissioned by Mar 12. 3) We also increase
capex estimates to US$2.5bn in FY12/13 each (from US$1.9bn earlier in each
year). We lower our EBITDA estimates by Rs27bn/Rs54bn (-20/-29%) and PAT
estimates by Rs22bn/Rs43bn (-41% /-51%) for FY12-13.
Impact: Earnings trajectory to decline; don’t expect recovery in Corus
(1) We estimate earnings/tonne have peaked out and earnings are likely to decline
going forward. We expect Tata Steel will generate breakeven EBITDA on Corus in
Q2FY12 (US$78/t in Q1) due to lower steel prices and higher raw material costs.
We expect EBITDA/t in Indian business to decline to US$375/t (from US$422/t in
Q1). (2) Given limited visibility in macro recovery in near-medium term in
Europe, we believe Corus will remain an overhang given its high financial leverage
and high cost structure.
Action: Downgrade to Neutral; Consensus earnings likely to come down
We expect Net Debt/EBITDA to increase from 3.8x to 4.6x in FY11-FY13 (net
debt of Rs467bn-Mar 2011). We are 41%/51% below consensus (76% buy
ratings).
Valuation: Lower price target to Rs460 given cut in earnings
We continue to value Tata Steel on SOTP basis with Indian business at 7.4x,
No catalysts ahead
We believe Tata Steel’s stock price is not attractive at the current levels:
Declining earnings trajectory - We estimate earnings/t have peaked out and
earnings are likely to decline going forward. We expect Tata Steel will
generate breakeven EBITDA on Corus in Q2FY12 (US$78/t in Q1) due to
lower steel prices and higher raw material costs. We expect EBITDA/t in
Indian business to decline to US$375/t (from US$422/t in Q1).
Corus to remain an overhang - Given limited visibility in macro recovery in
near-medium term in Europe, we believe Corus will remain an overhang
given its high financial leverage and high cost structure.
We downgrade Tata Steel to a Neutral as we lower earnings led by
— Lower EBITDA/T estimates in Corus from US$50/65 to US$22/23.
— Lower sales volumes in the Indian business in FY13 from 9.5mt to 7.9mt
given the 2.9mt Jamshedpur expansion will only be commissioned by
Mar 12.
— We also increase capex estimates to US$2.5bn in FY12/13 each (from
US$1.9bn earlier in each year).
— We lower our EBITDA estimates by Rs27bn/Rs54bn (-20/-29%) and
PAT estimates by Rs22bn/Rs43bn (-41% /-51%) for FY12-13.
Valuations not attractive enough – Though Tata Steel has corrected it is still
trading at 6x FY13 EV/EBITDA and trading at FY13 P/B of 0.95x (and
1.48x adjusted for goodwill). Tata Steel is trading at 0.86x March 2013 P/B
vs ArcelorMittal which is trading at 0.4x Dec 2012 P/B on Bloomberg
consensus earnings.
We have lowered our EBITDA estimates by Rs27bn/Rs54bn and PAT estimates
for Tata Steel by Rs22bn/Rs43bn (-41% /-51%) for FY12-13 primarily led by:
(1) Lower earnings in Corus
— We lower EBITDA estimates by Rs19bn/29bn (-59%/-67%) led by lower
volumes and EBITDA/t estimates.
— We lower EBITDA/t estimates from US$50/65 in FY12/FY3 to
US$22/23/t. EBITDA in FY13 is now primarily from the integration
benefits from Riversdale (coking coal) and New Millenium Corporation
(iron ore).
— We assume 0.7mt of coking coal and 3mt of iron from Riversdale and
New Millenium Corporation respectively in FY13.
— There is a marked difference between the last financial crisis and the
current global weakness/slow down. The last financial crisis witnessed a
severe inventory de-stocking driven by a collapse/freeze in bank lending
post the Lehman collapse, leading to a sharp fall in demand and steel
prices. However, this time around our global economists see no such
possibility currently.
(2) Lower earnings for the Indian business:
— We lower EBITDA estimates by Rs4bn/Rs22bn and PAT estimates by
Rs0.4/Rs14bn in FY12/13.
— Key change in FY13 estimates – We lower EBITDA/PAT estimates by
16%/15% led by 16% reduction in volumes – from 9.5mt to 7.9mt
Valuation
We value Tata Steel on an SOTP basis with the Indian business at 7.4x, Europe
at 6x, and others at 6.5x EV/EBITDA on normalised EBITDA (FY12-13E). We
downgrade our rating to Neutral from Buy and lower our price target to Rs460
(from Rs860).
Table 6: Tata Steel’s SOTP based Valuation (new)
TS-Standalone TS-Europe Others
Target EV/EBITDA (x) 7.40 6.00 6.50
Target EBITDA (Normalised FY12-13) 115,284 13,534 4,575
Target EV 853,100 81,205 29,740
Total target EV 964,044
Net debt 523,810
Target Market cap 440,235
Final Target Price* 459
Source: UBS estimates *Rounded off to Rs860
Table 7: Tata Steel’s SOTP based Valuation (old)
Rs m TS-Standalone TS-Europe Others
Target EV/EBITDA (x) 7.40 6.00 6.50
Target EBITDA (Normalised FY12-13) 128,084 37,326 4,641
Target EV 947,821 223,955 30,164
Total target EV 1,201,940
Net debt July10 478,452
Target Market cap 723,487
Target price (Rs) 816*
Source: UBS estimates; *Rounded to Rs820
Is the British Steel Pension Scheme fully funded?
Tata Steel Europe has two major pension schemes i.e., The British Steel
Pension Scheme (BSPS) in the UK and the Stichting Pensioenfonds
Hoogovens (SPH) at the Netherlands where the members along with the
company contribute to meet the cost of future service benefits subject to
review at the future actuarial valuations.
As per Tata Steel, total pension assets as of 31st March 2011 for both BSPS
and SPH were GBP 16.1bn while for BSPS alone it was GBP 11.3bn.
As per FY11 Annual Report of Tata Steel, the market value of the net
pension assets substantially exceeds that of its liabilities - Tata Steel
recognized net assets (surplus) of Rs22,865m/15,324 m (US$508/340m) for
FY11/10 while BSPS (the trust managing Tata Steel’s UK pension scheme)
accounts show a deficit of Rs24,573m (US$546m) at the end of CY10; the
FY11 liability number is yet to be calculated by BSPS.
According to the management, Tata Steel’s pension asset status (stated in the
annual report) is approved by the auditors. The difference between Tata
Steel’s pension calculations and those of BSPS differ primarily from
difference in assumptions of mortality, discount rates, commuting of
pensioners etc.
Going by BSPS numbers, there is an unfunded pension liability of cGBP361
(US$550m) as of CY10 end. However, the management has clarified that
even if we go by BSPS’s unfunded pension figures of GBP361mn (CY10
end) it does not create a cash flow impact as Tata Steel does not have to fund
that deficit.
The sharp decline in European equities in the last 2 months is likely to have
an impact on the Pension Assets (as c27.5% of assets is invested in equities)
– though this would be partly setoff by the increase in value of bonds as
yields have declined in the last 2 months.
While this will not represent an immediate funding need, Tata Steel will have
to agree on a recovery plan outlining the basis and timelines on which the
scheme will be returned to a fully funded status.
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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