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TATA STEEL (1-OVERWEIGHT; PT RS522; +27%): POISED TO DELIVER
We expect successful commissioning of Tata Steel’s 2.9mn-tonne brownfield expansion
in Jamshedpur to address several investor concerns. The facility would not only be ROE
accretive, but would also restrict the increase in gearing. Consolidated debt for Tata
Steel is down about 20% from the peak following assets sales earlier this year. The
European operation (TSE) remains vulnerable to macro headwinds, but now has several
levers to withstand the downturn. Tata Steel offers a favourable risk/reward profile, in
our view, with peak debt down, ROE accretive India expansion closer to commissioning
and valuations already factoring in a negative value for European operations. At 5.2x
FY13E EV/EBITDA, we see value in the stock. We initiate coverage with a 1-Overweight
rating and Rs522 PT, suggesting 27% potential upside.
India volume growth at higher margins: We expect rapid stabilization of the 2.9mn-tonne
expansion following full commissioning by 1Q FY13, as the new blast furnace (‘I’) is an
exact replica of the recently stabilized ‘H’ blast furnace. Although backward integration for
the new facility should fall in place over time, we expect the unit to benefit from operational
synergies and better product mix.
European operation has levers to withstand macro headwinds: The outlook in Europe
remains uncertain, but we are convinced that TSE will be able to reduce the gap in margins
with its European peers. Restructuring at several units has reduced fixed costs significantly
and a focus on product mix and a sharing of best practices within the group should help
TSE to withstand the crisis.
International raw material projects edging closer: The first phase of the Benga coking coal
project, Mozambique in which Tata Steel owns 35% stake (and has 40% off-take
agreement) in partnership with Rio-Tinto is expected to mine 1.7mt of hard coking coal in
FY13E. Similarly, the DSO iron ore project in Canada, in which Tata Steel holds 27% stake, is
expected to mine 1m tonne of ore in FY13E. Though these projects would offer very little
raw material security to begin with, commissioning of these projects is a crucial milestone
in the overall game plan to integrate the European operations.
Initiate with 1-Overweight rating and Rs522 PT: Although capex requirements will likely
remain elevated, we believe dilution risk has subsided following recent asset sales and
visibility of higher cash flows going forward. Higher-than-expected capex and a delay in the
commissioning of a 2.9mn tonne expansion remains a key risk. At 5.2x FY13E EV/EBITDA,
we initiate coverage with a 1-Overweight rating and Rs522 PT, suggesting 27% potential
upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TATA STEEL (1-OVERWEIGHT; PT RS522; +27%): POISED TO DELIVER
We expect successful commissioning of Tata Steel’s 2.9mn-tonne brownfield expansion
in Jamshedpur to address several investor concerns. The facility would not only be ROE
accretive, but would also restrict the increase in gearing. Consolidated debt for Tata
Steel is down about 20% from the peak following assets sales earlier this year. The
European operation (TSE) remains vulnerable to macro headwinds, but now has several
levers to withstand the downturn. Tata Steel offers a favourable risk/reward profile, in
our view, with peak debt down, ROE accretive India expansion closer to commissioning
and valuations already factoring in a negative value for European operations. At 5.2x
FY13E EV/EBITDA, we see value in the stock. We initiate coverage with a 1-Overweight
rating and Rs522 PT, suggesting 27% potential upside.
India volume growth at higher margins: We expect rapid stabilization of the 2.9mn-tonne
expansion following full commissioning by 1Q FY13, as the new blast furnace (‘I’) is an
exact replica of the recently stabilized ‘H’ blast furnace. Although backward integration for
the new facility should fall in place over time, we expect the unit to benefit from operational
synergies and better product mix.
European operation has levers to withstand macro headwinds: The outlook in Europe
remains uncertain, but we are convinced that TSE will be able to reduce the gap in margins
with its European peers. Restructuring at several units has reduced fixed costs significantly
and a focus on product mix and a sharing of best practices within the group should help
TSE to withstand the crisis.
International raw material projects edging closer: The first phase of the Benga coking coal
project, Mozambique in which Tata Steel owns 35% stake (and has 40% off-take
agreement) in partnership with Rio-Tinto is expected to mine 1.7mt of hard coking coal in
FY13E. Similarly, the DSO iron ore project in Canada, in which Tata Steel holds 27% stake, is
expected to mine 1m tonne of ore in FY13E. Though these projects would offer very little
raw material security to begin with, commissioning of these projects is a crucial milestone
in the overall game plan to integrate the European operations.
Initiate with 1-Overweight rating and Rs522 PT: Although capex requirements will likely
remain elevated, we believe dilution risk has subsided following recent asset sales and
visibility of higher cash flows going forward. Higher-than-expected capex and a delay in the
commissioning of a 2.9mn tonne expansion remains a key risk. At 5.2x FY13E EV/EBITDA,
we initiate coverage with a 1-Overweight rating and Rs522 PT, suggesting 27% potential
upside.
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