Buy Tata Steel: Triggers in place – attractive valuation: Nomura research,

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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.