Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel's (TATA) consolidated adjusted PAT declined 75% QoQ to INR3.6b. Reported PAT of INR2.1b included a
forex loss of INR1.5b. A high effective 87% tax rate dragged down PAT.
Tata Steel Europe (TSE) reported EBITDA of USD103m, in line with estimate. EBITDA per ton declined sharply by
USD46/ton to USD32/ton, squeezed by falling steel prices and higher coking coal costs. Tata Steel India's (TSI)
EBITDA per ton was USD380/t, which was a tad lower than estimate due to higher-than-expected other expenditure.
Consolidated EBITDA was affected by the elimination of USD77m on losses of smaller subsidiaries and intercompany
transfer of raw material. Smaller subsidiaries (such as South Africa and Dhamra Port) will continue to contribute a
negative USD30m-40m to consolidated EBITDA for a few more quarters.
Effective tax rate was high as some of the units still reported profit while there was a collective loss as a group of
subsidiaries. Going forward, effective consolidated tax rates will remain volatile depending on profitability of various
subsidiaries.
TSE's margins will come under pressure due to weakening steel prices while raw material costs will be sticky for the
next six months, despite weakening iron ore and coking coal prices on the spot market.
Despite weaker demand, TSI remains in sweet spot, due to the depreciation of the rupee against the US dollar and
iron-ore supply issues facing other Indian steel producers.
We are cutting our FY12 EPS by 46% to model weaker performance of subsidiaries in 2QFY12 and in 2HFY12. We
cut FY13 EPS 15% to factor in lower volume guidance for Indian operations to 8.3mt against 9mt earlier. The stock
trades at a PE of 6.4x and EV/EBIDA of 4.7x FY13E. Maintain Buy.
Losses at small subsidiaries, inter-company RM transfer losses, higher tax,
forex loss hit PAT
Tata Steel's (TATA) 2QFY12 consolidated PAT declined 75% QoQ to INR3.6b, which
was lower than our estimate of INR14b, due to EBITDA losses at some of the
subsidiaries and a very high tax rate. Reported consolidated PAT of INR2.1b included
a forex loss of INR1.5b, reported in other expenditure.
TSI (India) EBITDA was INR29.2b, lower than our estimate of INR 31.6b, due to
less-than-expected earnings in FAMD and higher-than-expected other expenditure.
Steel sales volume was 1.65m, which was sequentially flat. Adjusted PAT was
INR16.5b, lower than our estimate of INR19.1, largely due to lower EBITDA. EBITDA
per ton was USD380/t (against our estimate of USD397/t).
TSE reported EBITDA of USD103m, which was on expected lines. Deliveries were
sequentially flat at 3.5mt. EBITDA per ton was USD32, squeezed between a coking
coal cost increase and steel price realization decline. Other subsidiaries (as discussed
below) eroded TSE's EBITDA. Consolidated EBITDA was INR29b, which was a
tad lower than the standalone EBITDA.
The tax rate of 87% of consolidated reported PBT was unusually high for reasons
discussed below.
Capex in 2QFY12 was USD557m. USD202m of debt was prepaid. However, net
debt remains unchanged at USD8.4b.
Key highlights of the conference call: Expect losses in subsidiaries
collectively in 2HFY12
European steel demand remains under pressure. 3QFY12 is a seasonally weak quarter
and weakening steel prices will put pressure on realizations. 2QFY12 realizations
were down USD28/t QoQ at USD1,148/t.
TSE (Tata Steel Europe) is making minor adjustments to production and will continue
to watch market conditions. TSE will try to maximise volumes as far as possible to
recover fixed costs. TSE has started leveraging its global platform to sell products
across the world.
TSE's raw material costs increased by USD23/t due to higher coking coal costs. Raw
material costs now reflect peak coking-coal costs. Coking coal spot prices are
weakening but the benefits will only be seen from March 2012 due to a lagging effect
in accounts. Interestingly, TSE still has some annual contracts for raw material.
Although the exact composition of annual contracts was not revealed, annual contracts
for coking coal may meet 25% of TSE's requirement.
Since raw material costs will not ease in 2HFY12, TSE's margins will come under
further pressure. We can expect margins to rebound only after March 2012 as raw
material costs ease, assuming the steel market stabilizes.
Near-term Indian steel demand has been hit by inflation and high interest rates. However,
long-term demand growth outlook remains robust.
In India, the pricing environment is stable due to supply side issues and depreciation of
the Indian rupee.
TATA's retail sales of long products picked up traction, growing 45% YoY to 510kt.
Consolidated EBITDA of USD601m was USD77m lower than the individual sum of
(1) USD570m for India, (2) USD103m for TSE and (3) USD5m for SEA due to the
following factors:
There was elimination of profit on inter-company sales of raw material in the
TATA group as there is an attempt to leverage its global platform to source raw
material and the sale of finished products. Some raw material from Thailand was
transferred to other group companies to release working capital as a blast furnace
was mothballed. This contributed USD25m to USD77m of EBITDA elimination.
The South African ferro alloy business has been posting losses due to structural
problems.
There were blast furnace mothballing expenses in Thailand.
Tata Metaliks reported EBITDA loss of INR430m due to operational problems at
Reddy units. This unit was sold for INR1.8b.
The Dhamra Port business is now consolidated and it has yet to breakeven at
EBITDA level.
Effective tax rate was high at 87% of reported consolidated PBT as some of the units
(Ijmuiden) still reported profit while there was a collective loss as a group of subsidiaries.
Going forward, effective consolidated tax rates will remain volatile, depending on the
profitability of various subsidiaries.
Net pension surpluses shrank by USD244m to USD106m in 2QFY12 due to volatility
in capital markets. Nonetheless, it still remains in surplus. Consultations are on for a
Triennial Review to assess the need for a cash top-up.
FY13 EPS cut 15%; Indian business in a sweet spot; European uncertainty
adds to volatility, Maintain Buy
Earnings outlook has deteriorated due to volatility in steel prices. The management
stressed on an uncertain outlook for TSE in the near term. The benefit of softening
raw material prices will be seen only in FY13. We are cutting EBITDA estimates for
TSE and other subsidiaries from INR16.7b to a loss of INR2.4b in 2HFY12, a cut of
INR19b. This is in addition to a shortfall of INR5.4b in 2QFY12. Smaller subsidiaries
are expected to contribute an EBITDA loss of USD40m for a few more quarters.
For the Indian operations, we expect coking coal cost to still rise in 2HFY12 due to a
lagging effect and the depreciation of the rupee against the US dollar. For FY12 we
have cut standalone EBITDA by INR2.5b. Although we factor in lower EBITDA per
ton (in USD), the rupee depreciation cushioned the impact.
Collectively, consolidated FY12 EBITDA is cut by INR27b to INR130b. As a result,
FY12 EPS is cut sharply by 46% to INR33.1.
For FY13, we are cutting volumes for Indian operations from 9mt to 8.3mt due to a
delay in expansion of capacity to 10mtpa at Jamshedpur. As a result, EPS is cut by
15% to INR69.3.
Although the overseas business is facing headwinds from a global macro-economic
slowdown and uncertainty, the Indian business is in a sweet spot, in our view. The
Indian business is benefiting from depreciation of the rupee against the US dollar as it
reduces operating costs. Despite weaker demand in India, TATA is a beneficiary of
iron ore supply disruptions at other Indian steel producers. TATA's retail sales of long
products witnessed traction growing 45% YoY.
FY12 valuations now look steep but FY13 valuations are attractive provided steel
prices do not fall further. Demand in the western world is not expected to rebound
over the next 6-9 months due to a sovereign financial crisis. A lot now depends on
monitory easing in the Chinese economy in 2012, to boost steel demand. Fixed asset
investments contribute more than 60% of China's annual steel consumption. Since
China accounts for 45% of the world's steel consumption, a prolonged slow down in
fixed asset investment will send raw material prices spiraling down, which will put
further pressure on steel prices. TATA's bottom-line is most sensitive to steel prices.
We are cautious about the steel market outlook. The stock trades at a PE of 6.4x
FY13E and EV/EBIDA of 4.7x FY13E. Maintain Buy.
Company description
Tata Steel (TATA), the lowest cost steel producer in India,
has become the sixth largest steel maker in the world after
the acquisition of Corus. The combined entity has its business
spread over Europe, the UK, Asia, North America and the
rest of the world with 27mtpa capacity. On a consolidated
level, it has ~22% raw material security and plans to increase
it to 50-60%. Production will increase to 34mtpa through
brownfield expansions in Jamshedpur and green-field
projects in Orissa.
Key investment arguments
TATA's India saleable steel volumes will post CAGR
of 18% over FY11-13 due to ongoing capacity expansion
to 10mtpa at Jamshedpur.
TATA unlocked value (INR101b) through the sale of
its stake in FY11, which helped to deleverage its balance
sheet.
Overseas investments in raw material assets are
expected to start generating cash flow in FY12.
European operations are expected to perform better
after the recent restructuring across its locations.
Key investment risks
TATA's earnings have a high leverage to steel prices
and to TSE's earnings, as the demand scenario remains
challenging in Europe.
Recent developments
TATA recently announced a five-year improvement
program for its Ijmuiden plant in the Netherlands
through which it intends to invest EUR800m to enhance
productivity and efficiencies.
Valuation and view
The stock trades at EV/EBITDA of 4.7x FY3E.
Maintain Buy with a target price of INR575.
Sector view
The steel pricing environment has weakened across
regions due to an expected demand slowdown, led by
continued uncertainty in developed nations, high inflation
and resultant softening in economic growth in
developing countries.
Chinese steel prices started falling as steel demand
growth slowed due to a reduction in new projects. As
a result, steel and its raw material prices are expected
to fall over the next few months. Apparent world steel
use is expected to increase 6.5% to 1,398mt in 2011 as
per WSA. Indian steel demand growth is expected to
slow to 4.3% in 2011 and 7.9% in 2012.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel's (TATA) consolidated adjusted PAT declined 75% QoQ to INR3.6b. Reported PAT of INR2.1b included a
forex loss of INR1.5b. A high effective 87% tax rate dragged down PAT.
Tata Steel Europe (TSE) reported EBITDA of USD103m, in line with estimate. EBITDA per ton declined sharply by
USD46/ton to USD32/ton, squeezed by falling steel prices and higher coking coal costs. Tata Steel India's (TSI)
EBITDA per ton was USD380/t, which was a tad lower than estimate due to higher-than-expected other expenditure.
Consolidated EBITDA was affected by the elimination of USD77m on losses of smaller subsidiaries and intercompany
transfer of raw material. Smaller subsidiaries (such as South Africa and Dhamra Port) will continue to contribute a
negative USD30m-40m to consolidated EBITDA for a few more quarters.
Effective tax rate was high as some of the units still reported profit while there was a collective loss as a group of
subsidiaries. Going forward, effective consolidated tax rates will remain volatile depending on profitability of various
subsidiaries.
TSE's margins will come under pressure due to weakening steel prices while raw material costs will be sticky for the
next six months, despite weakening iron ore and coking coal prices on the spot market.
Despite weaker demand, TSI remains in sweet spot, due to the depreciation of the rupee against the US dollar and
iron-ore supply issues facing other Indian steel producers.
We are cutting our FY12 EPS by 46% to model weaker performance of subsidiaries in 2QFY12 and in 2HFY12. We
cut FY13 EPS 15% to factor in lower volume guidance for Indian operations to 8.3mt against 9mt earlier. The stock
trades at a PE of 6.4x and EV/EBIDA of 4.7x FY13E. Maintain Buy.
Losses at small subsidiaries, inter-company RM transfer losses, higher tax,
forex loss hit PAT
Tata Steel's (TATA) 2QFY12 consolidated PAT declined 75% QoQ to INR3.6b, which
was lower than our estimate of INR14b, due to EBITDA losses at some of the
subsidiaries and a very high tax rate. Reported consolidated PAT of INR2.1b included
a forex loss of INR1.5b, reported in other expenditure.
TSI (India) EBITDA was INR29.2b, lower than our estimate of INR 31.6b, due to
less-than-expected earnings in FAMD and higher-than-expected other expenditure.
Steel sales volume was 1.65m, which was sequentially flat. Adjusted PAT was
INR16.5b, lower than our estimate of INR19.1, largely due to lower EBITDA. EBITDA
per ton was USD380/t (against our estimate of USD397/t).
TSE reported EBITDA of USD103m, which was on expected lines. Deliveries were
sequentially flat at 3.5mt. EBITDA per ton was USD32, squeezed between a coking
coal cost increase and steel price realization decline. Other subsidiaries (as discussed
below) eroded TSE's EBITDA. Consolidated EBITDA was INR29b, which was a
tad lower than the standalone EBITDA.
The tax rate of 87% of consolidated reported PBT was unusually high for reasons
discussed below.
Capex in 2QFY12 was USD557m. USD202m of debt was prepaid. However, net
debt remains unchanged at USD8.4b.
Key highlights of the conference call: Expect losses in subsidiaries
collectively in 2HFY12
European steel demand remains under pressure. 3QFY12 is a seasonally weak quarter
and weakening steel prices will put pressure on realizations. 2QFY12 realizations
were down USD28/t QoQ at USD1,148/t.
TSE (Tata Steel Europe) is making minor adjustments to production and will continue
to watch market conditions. TSE will try to maximise volumes as far as possible to
recover fixed costs. TSE has started leveraging its global platform to sell products
across the world.
TSE's raw material costs increased by USD23/t due to higher coking coal costs. Raw
material costs now reflect peak coking-coal costs. Coking coal spot prices are
weakening but the benefits will only be seen from March 2012 due to a lagging effect
in accounts. Interestingly, TSE still has some annual contracts for raw material.
Although the exact composition of annual contracts was not revealed, annual contracts
for coking coal may meet 25% of TSE's requirement.
Since raw material costs will not ease in 2HFY12, TSE's margins will come under
further pressure. We can expect margins to rebound only after March 2012 as raw
material costs ease, assuming the steel market stabilizes.
Near-term Indian steel demand has been hit by inflation and high interest rates. However,
long-term demand growth outlook remains robust.
In India, the pricing environment is stable due to supply side issues and depreciation of
the Indian rupee.
TATA's retail sales of long products picked up traction, growing 45% YoY to 510kt.
Consolidated EBITDA of USD601m was USD77m lower than the individual sum of
(1) USD570m for India, (2) USD103m for TSE and (3) USD5m for SEA due to the
following factors:
There was elimination of profit on inter-company sales of raw material in the
TATA group as there is an attempt to leverage its global platform to source raw
material and the sale of finished products. Some raw material from Thailand was
transferred to other group companies to release working capital as a blast furnace
was mothballed. This contributed USD25m to USD77m of EBITDA elimination.
The South African ferro alloy business has been posting losses due to structural
problems.
There were blast furnace mothballing expenses in Thailand.
Tata Metaliks reported EBITDA loss of INR430m due to operational problems at
Reddy units. This unit was sold for INR1.8b.
The Dhamra Port business is now consolidated and it has yet to breakeven at
EBITDA level.
Effective tax rate was high at 87% of reported consolidated PBT as some of the units
(Ijmuiden) still reported profit while there was a collective loss as a group of subsidiaries.
Going forward, effective consolidated tax rates will remain volatile, depending on the
profitability of various subsidiaries.
Net pension surpluses shrank by USD244m to USD106m in 2QFY12 due to volatility
in capital markets. Nonetheless, it still remains in surplus. Consultations are on for a
Triennial Review to assess the need for a cash top-up.
FY13 EPS cut 15%; Indian business in a sweet spot; European uncertainty
adds to volatility, Maintain Buy
Earnings outlook has deteriorated due to volatility in steel prices. The management
stressed on an uncertain outlook for TSE in the near term. The benefit of softening
raw material prices will be seen only in FY13. We are cutting EBITDA estimates for
TSE and other subsidiaries from INR16.7b to a loss of INR2.4b in 2HFY12, a cut of
INR19b. This is in addition to a shortfall of INR5.4b in 2QFY12. Smaller subsidiaries
are expected to contribute an EBITDA loss of USD40m for a few more quarters.
For the Indian operations, we expect coking coal cost to still rise in 2HFY12 due to a
lagging effect and the depreciation of the rupee against the US dollar. For FY12 we
have cut standalone EBITDA by INR2.5b. Although we factor in lower EBITDA per
ton (in USD), the rupee depreciation cushioned the impact.
Collectively, consolidated FY12 EBITDA is cut by INR27b to INR130b. As a result,
FY12 EPS is cut sharply by 46% to INR33.1.
For FY13, we are cutting volumes for Indian operations from 9mt to 8.3mt due to a
delay in expansion of capacity to 10mtpa at Jamshedpur. As a result, EPS is cut by
15% to INR69.3.
Although the overseas business is facing headwinds from a global macro-economic
slowdown and uncertainty, the Indian business is in a sweet spot, in our view. The
Indian business is benefiting from depreciation of the rupee against the US dollar as it
reduces operating costs. Despite weaker demand in India, TATA is a beneficiary of
iron ore supply disruptions at other Indian steel producers. TATA's retail sales of long
products witnessed traction growing 45% YoY.
FY12 valuations now look steep but FY13 valuations are attractive provided steel
prices do not fall further. Demand in the western world is not expected to rebound
over the next 6-9 months due to a sovereign financial crisis. A lot now depends on
monitory easing in the Chinese economy in 2012, to boost steel demand. Fixed asset
investments contribute more than 60% of China's annual steel consumption. Since
China accounts for 45% of the world's steel consumption, a prolonged slow down in
fixed asset investment will send raw material prices spiraling down, which will put
further pressure on steel prices. TATA's bottom-line is most sensitive to steel prices.
We are cautious about the steel market outlook. The stock trades at a PE of 6.4x
FY13E and EV/EBIDA of 4.7x FY13E. Maintain Buy.
Company description
Tata Steel (TATA), the lowest cost steel producer in India,
has become the sixth largest steel maker in the world after
the acquisition of Corus. The combined entity has its business
spread over Europe, the UK, Asia, North America and the
rest of the world with 27mtpa capacity. On a consolidated
level, it has ~22% raw material security and plans to increase
it to 50-60%. Production will increase to 34mtpa through
brownfield expansions in Jamshedpur and green-field
projects in Orissa.
Key investment arguments
TATA's India saleable steel volumes will post CAGR
of 18% over FY11-13 due to ongoing capacity expansion
to 10mtpa at Jamshedpur.
TATA unlocked value (INR101b) through the sale of
its stake in FY11, which helped to deleverage its balance
sheet.
Overseas investments in raw material assets are
expected to start generating cash flow in FY12.
European operations are expected to perform better
after the recent restructuring across its locations.
Key investment risks
TATA's earnings have a high leverage to steel prices
and to TSE's earnings, as the demand scenario remains
challenging in Europe.
Recent developments
TATA recently announced a five-year improvement
program for its Ijmuiden plant in the Netherlands
through which it intends to invest EUR800m to enhance
productivity and efficiencies.
Valuation and view
The stock trades at EV/EBITDA of 4.7x FY3E.
Maintain Buy with a target price of INR575.
Sector view
The steel pricing environment has weakened across
regions due to an expected demand slowdown, led by
continued uncertainty in developed nations, high inflation
and resultant softening in economic growth in
developing countries.
Chinese steel prices started falling as steel demand
growth slowed due to a reduction in new projects. As
a result, steel and its raw material prices are expected
to fall over the next few months. Apparent world steel
use is expected to increase 6.5% to 1,398mt in 2011 as
per WSA. Indian steel demand growth is expected to
slow to 4.3% in 2011 and 7.9% in 2012.
No comments:
Post a Comment