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Adjusted PAT for 2QFY12 declined 4% QoQ (6% YoY) to INR217m, below our estimate of INR224m on account of
lower sponge iron production. Sponge iron production was down 1% QoQ (30% YoY) to 71,000 tons, as iron ore
supply was impacted by local issues.
Net sales grew 19% QoQ (down 1% YoY) to INR1.74b while realizations increased 23% QoQ to INR22,397/ton.
EBITDA decreased 10% QoQ (13% YoY) to INR299m while EBITDA/ton declined 8% QoQ to INR4,206.
Despite significantly lower production and sales volumes, strong sponge iron realizations are supporting both revenue
and margins. Current sponge iron prices are at a 3-year high in the domestic market. Mining ban in Karnataka and
regulatory rigor in the Barbil region has affected supply of iron ore to the industry.
We expect sponge iron production to be significantly lower at 300kt (v/s 383kt in FY11) due to iron supply issues.
We have cut our FY12 volume estimate from 355kt to 300kt, reducing our FY12 EPS estimate by 4%.
Radhikapur (East) coal block is on track. Coal production is likely to start in 2013.
The stock trades at an attractive EV of 2.1x FY12E EBITDA and 5.6x FY12E EPS. Maintain Buy.
Company description
Tata Sponge (TTSP) is located at Bilaipada near Joda in
the Keonjhar district of Orissa. It has a production capacity
of 390,000tpa of sponge iron. The company has also set up
26MW of captive power plants to gain from the waste hot
gases released from its kilns in phases.
Key investment arguments
Located close to iron ore mines (25km from plants),
which saves transport cost. TTSP has a strategic tieup
with Tata Steel, wherein it has leased equipment to
Tata Steel to operate the Khondbond iron ore mine and
it receives iron ore at significantly lower cost.
TTSP is one of the best managed sponge iron plants in
the country, with a wide service offering profile and
domain depth.
Key investment risks
Earnings are highly leveraged to sponge iron prices.
Lacking growth triggers, as there are no major capacity
expansion plans in the near future.
Recent developments
The company had a net cash surplus of ~INR1.7b as
on 30 September 2011.
Valuation and view
The stock trades at an EV of 2.1x FY12E EBITDA
and 5.6x FY12E EPS. Maintain Buy.
Sector view
The mining ban in Karnataka and regulatory rigor in
Barbil region has affected supply of iron ore to the
sponge iron industry. Marginal sponge iron producers
are forced either to operate at lower capacity or incur
high iron ore cost. This has resulted in strong sponge
iron prices shooting up to a 3-year high in the domestic
market. Prices are likely to remain strong in the near
term, as iron ore availability will remain a concern.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Adjusted PAT for 2QFY12 declined 4% QoQ (6% YoY) to INR217m, below our estimate of INR224m on account of
lower sponge iron production. Sponge iron production was down 1% QoQ (30% YoY) to 71,000 tons, as iron ore
supply was impacted by local issues.
Net sales grew 19% QoQ (down 1% YoY) to INR1.74b while realizations increased 23% QoQ to INR22,397/ton.
EBITDA decreased 10% QoQ (13% YoY) to INR299m while EBITDA/ton declined 8% QoQ to INR4,206.
Despite significantly lower production and sales volumes, strong sponge iron realizations are supporting both revenue
and margins. Current sponge iron prices are at a 3-year high in the domestic market. Mining ban in Karnataka and
regulatory rigor in the Barbil region has affected supply of iron ore to the industry.
We expect sponge iron production to be significantly lower at 300kt (v/s 383kt in FY11) due to iron supply issues.
We have cut our FY12 volume estimate from 355kt to 300kt, reducing our FY12 EPS estimate by 4%.
Radhikapur (East) coal block is on track. Coal production is likely to start in 2013.
The stock trades at an attractive EV of 2.1x FY12E EBITDA and 5.6x FY12E EPS. Maintain Buy.
Company description
Tata Sponge (TTSP) is located at Bilaipada near Joda in
the Keonjhar district of Orissa. It has a production capacity
of 390,000tpa of sponge iron. The company has also set up
26MW of captive power plants to gain from the waste hot
gases released from its kilns in phases.
Key investment arguments
Located close to iron ore mines (25km from plants),
which saves transport cost. TTSP has a strategic tieup
with Tata Steel, wherein it has leased equipment to
Tata Steel to operate the Khondbond iron ore mine and
it receives iron ore at significantly lower cost.
TTSP is one of the best managed sponge iron plants in
the country, with a wide service offering profile and
domain depth.
Key investment risks
Earnings are highly leveraged to sponge iron prices.
Lacking growth triggers, as there are no major capacity
expansion plans in the near future.
Recent developments
The company had a net cash surplus of ~INR1.7b as
on 30 September 2011.
Valuation and view
The stock trades at an EV of 2.1x FY12E EBITDA
and 5.6x FY12E EPS. Maintain Buy.
Sector view
The mining ban in Karnataka and regulatory rigor in
Barbil region has affected supply of iron ore to the
sponge iron industry. Marginal sponge iron producers
are forced either to operate at lower capacity or incur
high iron ore cost. This has resulted in strong sponge
iron prices shooting up to a 3-year high in the domestic
market. Prices are likely to remain strong in the near
term, as iron ore availability will remain a concern.
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