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Tata Steel’s stock price, after correcting more than 50%, is
trading close to our bear-case valuation. Our detailed analysis
suggests that Tata Steel’s domestic operations could deliver
much higher profitability compared with the previous cycles
even if steel prices remain low. Although investors’ concerns
on deteriorating outlook for Tata Steel Europe (TSE) are valid,
we believe that the probability of sustained Ebitda losses is
low. Valuations are attractive. However, weakness in steel
prices and deteriorating outlook for Europe may weigh on
near-term stock performance. Commissioning of 3mtpa steel
plant and improvement in TSE’s earnings visibility led by an
expected drop in bulk prices would act as triggers. Retain ADD.
Domestic operations better placed to weather downturn:
Earnings power of the domestic operations has improved significantly
compared with the past down-cycle, largely due to: 1) improvement in
product mix; 2) operational efficiencies; and 3) increased cost
advantage due to higher raw-material prices. We believe that
collectively, these factors would enable the domestic operations to
deliver per tonne Ebitda of US$275-300/tonne compared with a
bottom of US$78/tonne in FY02.
TSE unlikely to report sustained Ebitda losses: We share the
market’s concern that outlook for TSE has significantly deteriorated.
However, we see a low probability of sustained Ebitda losses. Shorter
duration of raw-material contracts means that profitability of TSE
would be restored as the high-cost inventory is consumed. Note that
more than 75% of global steel producers depend on third-party
metallic and the impact of lower realisations would be mitigated by a
drop in prices of bulk commodities. Realignment of capex is critical to
restore the market’s confidence in TSE’s ability to fund its operations.
Valuations attractive but earnings visibility holds the key: We cut
our earnings estimates for FY12 by 41% and FY13 by 44% as we build
in lower volumes, pressure on profitability and higher tax rate. We
expect earnings visibility to improve in coming quarters as steel prices
stabilise and reduced raw-material costs flow through TSE’s P&L.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel’s stock price, after correcting more than 50%, is
trading close to our bear-case valuation. Our detailed analysis
suggests that Tata Steel’s domestic operations could deliver
much higher profitability compared with the previous cycles
even if steel prices remain low. Although investors’ concerns
on deteriorating outlook for Tata Steel Europe (TSE) are valid,
we believe that the probability of sustained Ebitda losses is
low. Valuations are attractive. However, weakness in steel
prices and deteriorating outlook for Europe may weigh on
near-term stock performance. Commissioning of 3mtpa steel
plant and improvement in TSE’s earnings visibility led by an
expected drop in bulk prices would act as triggers. Retain ADD.
Domestic operations better placed to weather downturn:
Earnings power of the domestic operations has improved significantly
compared with the past down-cycle, largely due to: 1) improvement in
product mix; 2) operational efficiencies; and 3) increased cost
advantage due to higher raw-material prices. We believe that
collectively, these factors would enable the domestic operations to
deliver per tonne Ebitda of US$275-300/tonne compared with a
bottom of US$78/tonne in FY02.
TSE unlikely to report sustained Ebitda losses: We share the
market’s concern that outlook for TSE has significantly deteriorated.
However, we see a low probability of sustained Ebitda losses. Shorter
duration of raw-material contracts means that profitability of TSE
would be restored as the high-cost inventory is consumed. Note that
more than 75% of global steel producers depend on third-party
metallic and the impact of lower realisations would be mitigated by a
drop in prices of bulk commodities. Realignment of capex is critical to
restore the market’s confidence in TSE’s ability to fund its operations.
Valuations attractive but earnings visibility holds the key: We cut
our earnings estimates for FY12 by 41% and FY13 by 44% as we build
in lower volumes, pressure on profitability and higher tax rate. We
expect earnings visibility to improve in coming quarters as steel prices
stabilise and reduced raw-material costs flow through TSE’s P&L.
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