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Robust earnings, improved
balance sheet & free cashflow
positive at distress valuations
Action: Buy for expansion and improving cashflow
TATA Steel stock has underperformed its global peers despite its
comparatively stronger Indian operations and better-than-expected
performance in its European business. We maintain our Buy rating given
our view that: 1) the 2.9mtpa expansion in India by end-FY12 should drive
earnings growth; 2) an expected USD0.6bn decline in working capital on
falling raw material prices should further reduce leverage; and 3) TATA
should turn free cashflow positive from FY13F despite capex of USD2bn.
Catalyst: Earnings rebound likely 4QFY12F & 2.9mtpa expansion
TATA Steel has triggers expected to unfold over the next 2 quarters with
1) a forecast earnings rebound at its European operations on falling raw
material prices; and 2) a 2.9mtpa expansion expected by end-FY12.
Valuations: Building in a distress scenario
At its current price, the stock looks to be building in a distress scenario of
steel prices falling to USD550/t (from USD630/t currently), as well as
EBITDA/t of USD250/t for the Indian operations (USD400/t in 1HFY12)
and USD30/t for the European operations (USD50/t in 1HFY12). At these
assumptions, World Steel Dynamics estimates nearly half of global
capacity would be unprofitable.
We cut our target price to INR568 (from INR653). Indian operations
contribute INR644 (from INR690) at 6x EV/EBITDA and overseas
operations contribute INR-90/share (from INR-59) at 5x EV/EBITDA.
The lower TP primarily reflects our 14.5% earnings cut in FY13F due to
our weaker steel outlook.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Robust earnings, improved
balance sheet & free cashflow
positive at distress valuations
Action: Buy for expansion and improving cashflow
TATA Steel stock has underperformed its global peers despite its
comparatively stronger Indian operations and better-than-expected
performance in its European business. We maintain our Buy rating given
our view that: 1) the 2.9mtpa expansion in India by end-FY12 should drive
earnings growth; 2) an expected USD0.6bn decline in working capital on
falling raw material prices should further reduce leverage; and 3) TATA
should turn free cashflow positive from FY13F despite capex of USD2bn.
Catalyst: Earnings rebound likely 4QFY12F & 2.9mtpa expansion
TATA Steel has triggers expected to unfold over the next 2 quarters with
1) a forecast earnings rebound at its European operations on falling raw
material prices; and 2) a 2.9mtpa expansion expected by end-FY12.
Valuations: Building in a distress scenario
At its current price, the stock looks to be building in a distress scenario of
steel prices falling to USD550/t (from USD630/t currently), as well as
EBITDA/t of USD250/t for the Indian operations (USD400/t in 1HFY12)
and USD30/t for the European operations (USD50/t in 1HFY12). At these
assumptions, World Steel Dynamics estimates nearly half of global
capacity would be unprofitable.
We cut our target price to INR568 (from INR653). Indian operations
contribute INR644 (from INR690) at 6x EV/EBITDA and overseas
operations contribute INR-90/share (from INR-59) at 5x EV/EBITDA.
The lower TP primarily reflects our 14.5% earnings cut in FY13F due to
our weaker steel outlook.
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