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Tata Steel (TISC.BO): Buy; European concerns in the price
We believe Tata Steel will continue to see sustained strong profitability at its India business
(70% contribution), which should continue to benefit from high upstream integration and
volume growth from capacity expansion. The 3 mn tpa brownfield expansion in
Jamshedpur is scheduled for commissioning by March 2012, which should drive volume
growth in FY13E and increase the contribution of the more profitable India business in the
overall pie. Tata Steel’s India business has among the highest vertical integration (100% on
iron ore; 50% on coal) and is a market leader in high-margin auto grade steel: with 42%
market share, it is the leading supplier to the domestic auto industry. It is also one of the
most profitable steel makers: EBITDA/t is 2X that of its competitors in India.
The outlook for the European steel sector is cautious, with our ECS team now expecting a
0.1% GDP growth in 2012. However, the European steel sector has seen a disciplined
supply response, with announcements of a few furnaces being shut in response to a weak
demand outlook. Successful cost reduction initiatives and restructuring measures
undertaken at Tata Steel’s European business (formerly Corus) make it better positioned to
withstand macro shocks, in our view. Recent restructuring in European long products
business should drive gains of US$400 mn p.a. from 2HFY13E onwards. Moreover, raw
material projects in Canada and Mozambique are expected to commence supplies from
FY13E onwards, improving group margins and profitability.
We incorporate lower commodity price forecasts and cut our FY12E-14E EPS estimates by
4%-17%. We also lower our 12-m P/B-based TP to Rs600 (from Rs688) on a lower P/B
multiple of 1.2x (1.5x earlier) due to lower ROE. However, we think at current valuations,
most negatives seem to be priced in, and we retain our Buy rating.
Key Catalysts
(1) Tata Steel Europe’s quarterly earnings: any positive surprise on earnings would drive
the stock price up.
(2) Rising spot steel prices: Tata Steel’s earnings are highly levered to prices — a 1% rise
in steel prices would increase FY12E EBITDA by 5.6%.
Key Risks
Slower-than-expected demand recovery in Europe.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TISC.BO): Buy; European concerns in the price
We believe Tata Steel will continue to see sustained strong profitability at its India business
(70% contribution), which should continue to benefit from high upstream integration and
volume growth from capacity expansion. The 3 mn tpa brownfield expansion in
Jamshedpur is scheduled for commissioning by March 2012, which should drive volume
growth in FY13E and increase the contribution of the more profitable India business in the
overall pie. Tata Steel’s India business has among the highest vertical integration (100% on
iron ore; 50% on coal) and is a market leader in high-margin auto grade steel: with 42%
market share, it is the leading supplier to the domestic auto industry. It is also one of the
most profitable steel makers: EBITDA/t is 2X that of its competitors in India.
The outlook for the European steel sector is cautious, with our ECS team now expecting a
0.1% GDP growth in 2012. However, the European steel sector has seen a disciplined
supply response, with announcements of a few furnaces being shut in response to a weak
demand outlook. Successful cost reduction initiatives and restructuring measures
undertaken at Tata Steel’s European business (formerly Corus) make it better positioned to
withstand macro shocks, in our view. Recent restructuring in European long products
business should drive gains of US$400 mn p.a. from 2HFY13E onwards. Moreover, raw
material projects in Canada and Mozambique are expected to commence supplies from
FY13E onwards, improving group margins and profitability.
We incorporate lower commodity price forecasts and cut our FY12E-14E EPS estimates by
4%-17%. We also lower our 12-m P/B-based TP to Rs600 (from Rs688) on a lower P/B
multiple of 1.2x (1.5x earlier) due to lower ROE. However, we think at current valuations,
most negatives seem to be priced in, and we retain our Buy rating.
Key Catalysts
(1) Tata Steel Europe’s quarterly earnings: any positive surprise on earnings would drive
the stock price up.
(2) Rising spot steel prices: Tata Steel’s earnings are highly levered to prices — a 1% rise
in steel prices would increase FY12E EBITDA by 5.6%.
Key Risks
Slower-than-expected demand recovery in Europe.
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