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Tata Steel (TISC.BO)
2QFY12: Europe a Wildcard; Subsidiary/JV Losses
2QFY12 adj cons PAT down 75% yoy — Tata Steel’s consol. adj PAT came in at
Rs3.6bn (reported Rs2.1bn), below estimates. The underperformance is due to $77m
of EBITDA losses – accounted for by subsidiary losses/inter-company adjustments;
and higher tax. Some subsidiaries making losses are 1) Tata Steel KZN (90%) - ferro
chrome business in S. Africa (FY11 loss of $11m) hit by low chrome ore availability/high
power costs - likely to remain weak; 2) Tata Metaliks (50%), EBITDA loss of $9m in
2QFY12 – Redi unit sold now; 3) Dhamra Port (50%) recently commissioned; 4)
Mothballing impact of mini blast furnace (BF) in Tata Steel Thailand. Standalone tax
was higher than consolidated tax despite consolidated PAT being lower.
1Q India highlights — Adj PAT at Rs16.5bn rose 3% yoy, in line with Citi est. EBITDA
margin (incl other income) was 36% vs 38% last year (40% in 1QFY12). EBITDA/t was
$365 (adj) vs $336 in 2QFY11 and $403 in 1Q. Management expects an EBITDA level
of $350-375/t to sustain. Sales volumes fell marginally to 1.65mt (flats rose 3% yoy).
Average steel realizations rose 20% yoy and 2% qoq. Margins declined on higher raw
material/power costs and weak performance of the ferro alloys division. EBIT margin
fell to 18% vs 33% on lower demand from Japan’s stainless steel industry/lower prices.
Europe EBITDA/t down 42% yoy — EBITDA/t was $30 in 2Q (Citi est $25) vs $51 last
year and $71 in 1Q. The quarter was impacted by higher raw material prices. Volumes
fell marginally to 3.48mt (3.53mt last year). Europe remains a wildcard and
management expects EBITDA/t to be weaker in 3Q vs 2Q. They have taken steps to
mothball 1mtpa BF capacity in Scunthorpe and close the construction products
business in South Wales. Pension surplus was £106m inSep11 vs £350m in June11.
Tata Steel Asia EBITDA/t fell 81% yoy — EBITDA/t was $6 vs $34. Volumes were flat
yoy at 0.78mt. Asia was impacted by floods in Thailand/weak Australian demand.
Risks — There is downside risk to our forecasts. We await further clarity from
management on the performance of the subsidiaries/JVs; following which we will
review our estimates.
Tata Steel
Company description
Tata Steel Ltd (TSL) has a crude-steel capacity of 6.8mtpa, of which ~50% is rolled
into flat products and the rest sold as long products. It sells ferro alloys, tubes,
bearings and some mineral products. Tata Steel Europe (TSE, earlier called Corus),
TSL's 100% subsidiary, is a Northern European Steel long and flat steel producer
with 16m tpa of crude steel capacity and production bases in the UK and the
Netherlands. TSL has a presence in Asia through NatSteel (100%-owned) and Tata
Steel Thailand (67.9%-owned). Adding Asia-based capacities takes its total steel
capacity to ~25mtpa. Of this capacity, 27% is in India, 64% in the UK/Europe and
the rest in SE Asia. The crude steel capacity in India will likely be hiked by a further
42% to 9.8mtpa by end 2011, taking India's share of total steel capacity to 36%.
Investment strategy
We rate TSL as Buy (1) with a TP of Rs632. TSL India's combination of raw material
security, operating efficiencies, high value products, and branding helps it earn EBITDA
margins of 34-39%. Most capacity increases are in India where it should maintain raw
material security at existing levels (100% iron ore, 50-55% for coking coal) and we expect
the Indian business to earn EBITDA/t of US$340-430 in FY12-14E. In India, volumes are
expected to be flat in FY12, but grow 29% in FY13. Our estimates use average steel price
of US$830/t in FY12 and US$823/t in FY13 and due to our Rs/US$ trend expectation,
assume that average steel prices for TSL India will rise 9% YoY in FY12 and fall 1% in
FY13. TSE has continued to report positive EBITDA since 3QFY10 (EBITDA/t of US$25-
94) and we expect EBITDA/t of US$26/37 during FY12E/13E. In both auto and
construction, there is divergence in Europe and the North/South Divide continues.
German construction/auto orders/registrations are robust but construction confidence has
dipped in UK & EU. Prospects of a deepening of the Euro area sovereign crisis creates
risk - again for S. European economies, hence for steel demand too. We are concerned
about the demand outlook in Europe, especially near-term, but are positive on a 12-18
month time frame. Consolidated gross debt was US$13.6bn and net debt was US$9.1bn
at Jun-11. We expect net debt/EBITDA of 3.1x and net D/E of 1.1x as of Mar-12E.
Valuation
We value TSL using SOTP. We use EV/EBITDA as our preferred valuation metric
for TSL largely due to its high leverage. For TSL India, we use a target EV/EBITDA
of 7.0x on Sep12E earnings, a premium to the average of 6.5x FY12E for the other
Indian steel majors to reflect greater integration and relatively higher margins. Tata
Steel Europe and its other non-Indian businesses are valued at 4.5x EV/EBITDA,
~10% below the five-year trading average for the European steel sector. Based on
the above, we arrive at a target price of Rs632. At our target price, the stock would
trade at a consolidated Sep12E EV/EBITDA of 6.5x and P/E of 10.6x.
Risks
Key downside risks to our investment thesis on TSL are: 1) Weaker steel prices; 2)
Higher raw material prices; 3) FX trends; 4) Lower volumes than we expect,
especially for Tata Steel Europe. Upside risks are: 1) Upside in steel prices in
Europe or India, driven by better demand or plant shutdowns; 2) Weaker raw
material prices than expected which would benefit Tata Steel Europe. If any of these
risk factors has a greater downside impact than we anticipate, the share price will
likely have difficulty attaining our TP. Conversely, if the impact of any of these upside
risks is greater than we anticipate, the stock could exceed our TP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TISC.BO)
2QFY12: Europe a Wildcard; Subsidiary/JV Losses
2QFY12 adj cons PAT down 75% yoy — Tata Steel’s consol. adj PAT came in at
Rs3.6bn (reported Rs2.1bn), below estimates. The underperformance is due to $77m
of EBITDA losses – accounted for by subsidiary losses/inter-company adjustments;
and higher tax. Some subsidiaries making losses are 1) Tata Steel KZN (90%) - ferro
chrome business in S. Africa (FY11 loss of $11m) hit by low chrome ore availability/high
power costs - likely to remain weak; 2) Tata Metaliks (50%), EBITDA loss of $9m in
2QFY12 – Redi unit sold now; 3) Dhamra Port (50%) recently commissioned; 4)
Mothballing impact of mini blast furnace (BF) in Tata Steel Thailand. Standalone tax
was higher than consolidated tax despite consolidated PAT being lower.
1Q India highlights — Adj PAT at Rs16.5bn rose 3% yoy, in line with Citi est. EBITDA
margin (incl other income) was 36% vs 38% last year (40% in 1QFY12). EBITDA/t was
$365 (adj) vs $336 in 2QFY11 and $403 in 1Q. Management expects an EBITDA level
of $350-375/t to sustain. Sales volumes fell marginally to 1.65mt (flats rose 3% yoy).
Average steel realizations rose 20% yoy and 2% qoq. Margins declined on higher raw
material/power costs and weak performance of the ferro alloys division. EBIT margin
fell to 18% vs 33% on lower demand from Japan’s stainless steel industry/lower prices.
Europe EBITDA/t down 42% yoy — EBITDA/t was $30 in 2Q (Citi est $25) vs $51 last
year and $71 in 1Q. The quarter was impacted by higher raw material prices. Volumes
fell marginally to 3.48mt (3.53mt last year). Europe remains a wildcard and
management expects EBITDA/t to be weaker in 3Q vs 2Q. They have taken steps to
mothball 1mtpa BF capacity in Scunthorpe and close the construction products
business in South Wales. Pension surplus was £106m inSep11 vs £350m in June11.
Tata Steel Asia EBITDA/t fell 81% yoy — EBITDA/t was $6 vs $34. Volumes were flat
yoy at 0.78mt. Asia was impacted by floods in Thailand/weak Australian demand.
Risks — There is downside risk to our forecasts. We await further clarity from
management on the performance of the subsidiaries/JVs; following which we will
review our estimates.
Tata Steel
Company description
Tata Steel Ltd (TSL) has a crude-steel capacity of 6.8mtpa, of which ~50% is rolled
into flat products and the rest sold as long products. It sells ferro alloys, tubes,
bearings and some mineral products. Tata Steel Europe (TSE, earlier called Corus),
TSL's 100% subsidiary, is a Northern European Steel long and flat steel producer
with 16m tpa of crude steel capacity and production bases in the UK and the
Netherlands. TSL has a presence in Asia through NatSteel (100%-owned) and Tata
Steel Thailand (67.9%-owned). Adding Asia-based capacities takes its total steel
capacity to ~25mtpa. Of this capacity, 27% is in India, 64% in the UK/Europe and
the rest in SE Asia. The crude steel capacity in India will likely be hiked by a further
42% to 9.8mtpa by end 2011, taking India's share of total steel capacity to 36%.
Investment strategy
We rate TSL as Buy (1) with a TP of Rs632. TSL India's combination of raw material
security, operating efficiencies, high value products, and branding helps it earn EBITDA
margins of 34-39%. Most capacity increases are in India where it should maintain raw
material security at existing levels (100% iron ore, 50-55% for coking coal) and we expect
the Indian business to earn EBITDA/t of US$340-430 in FY12-14E. In India, volumes are
expected to be flat in FY12, but grow 29% in FY13. Our estimates use average steel price
of US$830/t in FY12 and US$823/t in FY13 and due to our Rs/US$ trend expectation,
assume that average steel prices for TSL India will rise 9% YoY in FY12 and fall 1% in
FY13. TSE has continued to report positive EBITDA since 3QFY10 (EBITDA/t of US$25-
94) and we expect EBITDA/t of US$26/37 during FY12E/13E. In both auto and
construction, there is divergence in Europe and the North/South Divide continues.
German construction/auto orders/registrations are robust but construction confidence has
dipped in UK & EU. Prospects of a deepening of the Euro area sovereign crisis creates
risk - again for S. European economies, hence for steel demand too. We are concerned
about the demand outlook in Europe, especially near-term, but are positive on a 12-18
month time frame. Consolidated gross debt was US$13.6bn and net debt was US$9.1bn
at Jun-11. We expect net debt/EBITDA of 3.1x and net D/E of 1.1x as of Mar-12E.
Valuation
We value TSL using SOTP. We use EV/EBITDA as our preferred valuation metric
for TSL largely due to its high leverage. For TSL India, we use a target EV/EBITDA
of 7.0x on Sep12E earnings, a premium to the average of 6.5x FY12E for the other
Indian steel majors to reflect greater integration and relatively higher margins. Tata
Steel Europe and its other non-Indian businesses are valued at 4.5x EV/EBITDA,
~10% below the five-year trading average for the European steel sector. Based on
the above, we arrive at a target price of Rs632. At our target price, the stock would
trade at a consolidated Sep12E EV/EBITDA of 6.5x and P/E of 10.6x.
Risks
Key downside risks to our investment thesis on TSL are: 1) Weaker steel prices; 2)
Higher raw material prices; 3) FX trends; 4) Lower volumes than we expect,
especially for Tata Steel Europe. Upside risks are: 1) Upside in steel prices in
Europe or India, driven by better demand or plant shutdowns; 2) Weaker raw
material prices than expected which would benefit Tata Steel Europe. If any of these
risk factors has a greater downside impact than we anticipate, the share price will
likely have difficulty attaining our TP. Conversely, if the impact of any of these upside
risks is greater than we anticipate, the stock could exceed our TP.
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