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Tata Steel (TATA)
Metals & Mining
Near-term negatives loom, better bet with 12-month view. Tata Steel have a lot of
catalysts going from a 12-month view such as (1) commissioning of integrated 3.2 mtpa
brownfield steel expansion, (2) start of shipments from overseas raw material projects,
and (3) likely continuation of strong performance in the domestic market. However, all
these may get drowned in the noise related to likely weak 3QFY12E performance and
continued negative news flow from Europe. BUY with a 12-month view but be
prepared to weather near-term negatives.
Earnings call allays a few concerns and adds a few
Tata Steel’s EBITDA performance was not as bad as it appeared initially. The company included
Rs1.5 bn of forex losses above the EBITDA line. Adjusted for this number, EBITDA/ tonne for the
India business was at a solid US$386/ tonne. Even consolidated numbers appear to be decent.
We are also impressed by a strong US$30/ tonne of EBITDA from Tata Steel Europe (TSE).
However, there are a few concerns as well, including (1) subsidiaries other than TSE reported
EBITDA loss of US$77 mn though the magnitude of loss will reduce in subsequent quarters
(discussed in detail later), and (2) likelihood of tax rates remaining at elevated levels as long as
overseas profitability remains low.
Solid positives over the next 12-months but a few negatives in the near term
The Tata Steel stock has solid catalysts from a 12-month view in the form of (1) commissioning of
3.2 mtpa integrated steel plant in Jamshedpur, (2) likely release of working capital after recent
decline in raw material prices, (3) further cost rationalization at TSE, (4) overseas raw material
project investments may start delivering, and (5) likely continuation of strong performance in the
domestic market. However, near-term concerns may take a precedence with likely loss at the
EBITDA level at TSE (raw material price increase accompanied by finished steel price decline) and
continued negative news flow from European operations.
Stock building in sustainable EBITDA loss at TSE, unlikely in our view. BUY
We have made a few adjustments to our earnings estimates; we model EBITDA of
US$429/505/640 mn from TSE for FY2012/13/14E, a cut of 23.5%/16.9%/18.7%. We retain our
estimates on Tata Steel India, cut in steel price assumption is offset by Rupee depreciation. Stock
trades at 4.5X FY2013E adjusted EBITDA and 6.3X earnings. We maintain our BUY rating with
revised TP of Rs590. The stock price is building in zero sustainable EBITDA at TSE, unlikely in our
view. Our base target price for FY2013E is based on (1) CIS/ China HRC export price of US$733/
tonne, (2) underlying iron ore price of US$125/ tonne and coking coal price of US$250/ tonne,
and (3) TSE EBITDA/ tonne of US$37 for FY2013E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TATA)
Metals & Mining
Near-term negatives loom, better bet with 12-month view. Tata Steel have a lot of
catalysts going from a 12-month view such as (1) commissioning of integrated 3.2 mtpa
brownfield steel expansion, (2) start of shipments from overseas raw material projects,
and (3) likely continuation of strong performance in the domestic market. However, all
these may get drowned in the noise related to likely weak 3QFY12E performance and
continued negative news flow from Europe. BUY with a 12-month view but be
prepared to weather near-term negatives.
Earnings call allays a few concerns and adds a few
Tata Steel’s EBITDA performance was not as bad as it appeared initially. The company included
Rs1.5 bn of forex losses above the EBITDA line. Adjusted for this number, EBITDA/ tonne for the
India business was at a solid US$386/ tonne. Even consolidated numbers appear to be decent.
We are also impressed by a strong US$30/ tonne of EBITDA from Tata Steel Europe (TSE).
However, there are a few concerns as well, including (1) subsidiaries other than TSE reported
EBITDA loss of US$77 mn though the magnitude of loss will reduce in subsequent quarters
(discussed in detail later), and (2) likelihood of tax rates remaining at elevated levels as long as
overseas profitability remains low.
Solid positives over the next 12-months but a few negatives in the near term
The Tata Steel stock has solid catalysts from a 12-month view in the form of (1) commissioning of
3.2 mtpa integrated steel plant in Jamshedpur, (2) likely release of working capital after recent
decline in raw material prices, (3) further cost rationalization at TSE, (4) overseas raw material
project investments may start delivering, and (5) likely continuation of strong performance in the
domestic market. However, near-term concerns may take a precedence with likely loss at the
EBITDA level at TSE (raw material price increase accompanied by finished steel price decline) and
continued negative news flow from European operations.
Stock building in sustainable EBITDA loss at TSE, unlikely in our view. BUY
We have made a few adjustments to our earnings estimates; we model EBITDA of
US$429/505/640 mn from TSE for FY2012/13/14E, a cut of 23.5%/16.9%/18.7%. We retain our
estimates on Tata Steel India, cut in steel price assumption is offset by Rupee depreciation. Stock
trades at 4.5X FY2013E adjusted EBITDA and 6.3X earnings. We maintain our BUY rating with
revised TP of Rs590. The stock price is building in zero sustainable EBITDA at TSE, unlikely in our
view. Our base target price for FY2013E is based on (1) CIS/ China HRC export price of US$733/
tonne, (2) underlying iron ore price of US$125/ tonne and coking coal price of US$250/ tonne,
and (3) TSE EBITDA/ tonne of US$37 for FY2013E.
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