Edelweiss:: Tata Steel - Lowering volume to audible levels; visit note; Buy

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Tata Steel (TATA IN, INR 363, Buy)

We recently met the management of Tata Steel and following are the excerpts: a) Volume for European operations estimated to be ~13.8mt and 13.5mt for FY12 and FY13 respectively, b) European operations EBITDA/t in H2FY12 to be sub-USD10 and USD45-50 in FY13, and c) India capacity expansion on track, expect incremental volume of 1.2mt in FY13. We are lowering our volume estimates by 1.8% and 6.9% for FY12 and FY13 respectively, to bring them in-line with the management guidance. As a result, our EBITDA is being revised downwards by ~1% for FY12 and 11% for FY13. Our revised price target is INR502/share; maintain ‘BUY’         

Europe steel volume to be 13.5mt in FY13, EBITDA/t at sub-USD10

For FY12, Europe steel volume is likely to be 13.8mt. However, due to demand slowdown and a partial shutdown of operations at Port Talbot for rebuilding the blast furnace, the company is guiding for a volume of ~13.5mt in FY13. Owing to pressures on steel prices and marginal benefits of lower raw material prices, EBITDA/t in H2FY12 is guided to be sub-USD10 and USD45-50 for FY13.

Slow stabilization at Jamshedpur to yield lower volume in FY13

The 3mtpa expansion project at Jamshedpur is on track to be commissioned by March 2012. However, the company has guided for 1.2mt–1.5mt of incremental volume in FY13 from this capacity, considering the time for stabilization and integration with the existing unit. This transpires into a volume of ~8 mt for FY13 vs our estimate of 8.6mt.

Outlook and valuation: Subdued earnings; maintain ‘BUY’

Factoring in a lower volume of 13.8mt and 13.5mt for European operations in FY12 and FY13 respectively and 8mt for India business in FY13, our FY13E EBITDA is being revised downwards by ~10.6%. EBITDA/t for Europe is now down to USD32/t (earlier USD41/t). We are lowering our target price from INR617 to INR502; maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock.