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Tata Steel (TATA)
Metals & Mining
A good bet; focus on financials beyond 3Q. Tata Steel remains our preferred pick in
the Indian metals and mining space. The company has strong catalysts from a 12-
month view including (1) commissioning of an integrated 2.9 mtpa brownfield steel
expansion, (2) start of shipments from overseas raw material projects and (3) likely
continuation of strong performance in the domestic market. Trading at 0.8X FY2013E
P/B and 4.7X FY2013E adjusted EBITDA, we find Tata Steel’s valuations attractive. Near
term concerns are well known and may not be as bad as Street’s expectations. BUY
Steel prices stabilize; Rupee depreciation helping the sector
Global steel prices have corrected by about 16% over the past four months due to a slowdown in
most markets, except North America, and are now quoting at distressed offers, from CIS countries,
of US$575-590/tonne (HRC, FOB). On the positive side, production cuts and low inventory levels
across key markets (except North America) should ensure stability; prices can even improve
moderately on potential restocking. Domestic markets have been insulated from the steel price
decline due to a sharp 15% depreciation of the Rupee versus the US Dollar. Domestic prices have
potential to move up in line with potential change in global steel prices.
Value-accretive 2.9mtpa expansion on track
Tata Steel is on track to commission a 2.9 mtpa steel making capacity expansion in Jamshedpur by
April 2012, which will reflect in strong 22% but back-ended volume growth in FY2013E. Note
that the expanded capacity will be self-sufficient on iron ore and generate profitability in excess of
US$300/tonne. More important, EBITDA contribution from India operations may increase to 80%
of EBITDA by FY2013E from less than 50% in FY2009, which will significantly de-risk earnings.
Overseas raw material projects- shipments from Benga coking coal project to start soon
Production from the Benga coking coal project has started with the first shipment expected in mid-
February 2012. Shipments in the first year will likely be 1 mn tonnes, which will ramp up to 1.5 mn
tonnes in the second year. Progress on the DSO project is broadly in line with the management
guidance and should start contributing in by the end of 2012. Note that we have not assigned any
valuation for raw material projects in our SOTP- based target price of Rs490.
Maintain BUY on inexpensive valuations
Tata Steel trades at 0.8X FY2013E book and 4.7X adjusted EBITDA, inexpensive in our view. The
current stock price effectively builds in EBITDA losses from TSE, which seems harsh. The company
has catalysts in the form of profitable domestic capacity commissioning, payback from overseas
raw material projects and reduction in working capital for TSE.
Volume growth for India business may be back-ended
Tata Steel will take out blast furnace ‘F’ for relining in May 2012, the completion of which
may take seven months. This will impact hot metal production by 0.8 mn tonnes (hot metal
capacity of ‘F’ blast furnace if 1.3 mtpa). However this could be offset by a ramp up of a
new 3mtpa+ ‘I’ blast furnace. It is plausible that volume growth in FY2013 may be backended
given that ramp up from new blast furnace may coincide with the shut down of ‘F’
blast furnace.
Tata Steel Europe—look beyond 3Q performance
The Street’s concern about Tata Steel is primarily is driven by a likely weak 3QFY12
performance and sustainability of the overall performance. Concerns are valid to some
extent given a steep decline in steel realization and lag impact of higher raw material prices.
This may lead to EBITDA losses in the near term. We forecast EBITDA loss of US$20/tonne.
On the positive side, the company has protected its volume share, which can drive better
absorption of fixed expenses.
The March 2012 quarter is likely to be a better quarter led by (1) stability in realizations and
possibility of increase with potential restocking by March 2012 and (2) lower raw material
cost. Tata Steel has moved iron ore contract prices to spot basis. Effectively iron ore for the
quarter will be shipped at a provisional price by miners with settlement on final prices at the
end of the quarter. For example iron ore price for March 2012 quarter will be based on
average spot prices for JFM 2012. This is a departure from the past practice of using prior
three month spot price as the contract iron ore price for the quarter.
The company has also undertaken to reduce cost structures and improve cash flows such as
(1) mothballing one of its mini blast furnaces in Thailand where operations were severely
impacted by floods in the region and escalated raw material prices; (2) mothballing
approximately 1 mn tonnes of blast furnace capacity at Scunthorpe is in addition to the
closure of its downstream facility in Wales, catering to the construction segment, which
resulted in the elimination of around 70 jobs. The company may eliminate 2,500-3,000 jobs
(5-7% of the workforce). A cut in subcontracted labor will be over and above this number
and (3) close monitoring of all capex items spends including maintenance capex. Note that
Tata Steel had stepped up capex to US$600 mn a year starting FY2012. This number may be
recalibrated in view of the slowdown. We note that the company has taken several
initiatives over the past few years to make European operations competitive. Restructuring
and cost alignment during the previous downturn and similar initiatives currently will hold
the company in good stead and lead to stable performance in FY2013. Our EBITDA estimate
of US$28/tonne for TSE is conservative.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TATA)
Metals & Mining
A good bet; focus on financials beyond 3Q. Tata Steel remains our preferred pick in
the Indian metals and mining space. The company has strong catalysts from a 12-
month view including (1) commissioning of an integrated 2.9 mtpa brownfield steel
expansion, (2) start of shipments from overseas raw material projects and (3) likely
continuation of strong performance in the domestic market. Trading at 0.8X FY2013E
P/B and 4.7X FY2013E adjusted EBITDA, we find Tata Steel’s valuations attractive. Near
term concerns are well known and may not be as bad as Street’s expectations. BUY
Steel prices stabilize; Rupee depreciation helping the sector
Global steel prices have corrected by about 16% over the past four months due to a slowdown in
most markets, except North America, and are now quoting at distressed offers, from CIS countries,
of US$575-590/tonne (HRC, FOB). On the positive side, production cuts and low inventory levels
across key markets (except North America) should ensure stability; prices can even improve
moderately on potential restocking. Domestic markets have been insulated from the steel price
decline due to a sharp 15% depreciation of the Rupee versus the US Dollar. Domestic prices have
potential to move up in line with potential change in global steel prices.
Value-accretive 2.9mtpa expansion on track
Tata Steel is on track to commission a 2.9 mtpa steel making capacity expansion in Jamshedpur by
April 2012, which will reflect in strong 22% but back-ended volume growth in FY2013E. Note
that the expanded capacity will be self-sufficient on iron ore and generate profitability in excess of
US$300/tonne. More important, EBITDA contribution from India operations may increase to 80%
of EBITDA by FY2013E from less than 50% in FY2009, which will significantly de-risk earnings.
Overseas raw material projects- shipments from Benga coking coal project to start soon
Production from the Benga coking coal project has started with the first shipment expected in mid-
February 2012. Shipments in the first year will likely be 1 mn tonnes, which will ramp up to 1.5 mn
tonnes in the second year. Progress on the DSO project is broadly in line with the management
guidance and should start contributing in by the end of 2012. Note that we have not assigned any
valuation for raw material projects in our SOTP- based target price of Rs490.
Maintain BUY on inexpensive valuations
Tata Steel trades at 0.8X FY2013E book and 4.7X adjusted EBITDA, inexpensive in our view. The
current stock price effectively builds in EBITDA losses from TSE, which seems harsh. The company
has catalysts in the form of profitable domestic capacity commissioning, payback from overseas
raw material projects and reduction in working capital for TSE.
Volume growth for India business may be back-ended
Tata Steel will take out blast furnace ‘F’ for relining in May 2012, the completion of which
may take seven months. This will impact hot metal production by 0.8 mn tonnes (hot metal
capacity of ‘F’ blast furnace if 1.3 mtpa). However this could be offset by a ramp up of a
new 3mtpa+ ‘I’ blast furnace. It is plausible that volume growth in FY2013 may be backended
given that ramp up from new blast furnace may coincide with the shut down of ‘F’
blast furnace.
Tata Steel Europe—look beyond 3Q performance
The Street’s concern about Tata Steel is primarily is driven by a likely weak 3QFY12
performance and sustainability of the overall performance. Concerns are valid to some
extent given a steep decline in steel realization and lag impact of higher raw material prices.
This may lead to EBITDA losses in the near term. We forecast EBITDA loss of US$20/tonne.
On the positive side, the company has protected its volume share, which can drive better
absorption of fixed expenses.
The March 2012 quarter is likely to be a better quarter led by (1) stability in realizations and
possibility of increase with potential restocking by March 2012 and (2) lower raw material
cost. Tata Steel has moved iron ore contract prices to spot basis. Effectively iron ore for the
quarter will be shipped at a provisional price by miners with settlement on final prices at the
end of the quarter. For example iron ore price for March 2012 quarter will be based on
average spot prices for JFM 2012. This is a departure from the past practice of using prior
three month spot price as the contract iron ore price for the quarter.
The company has also undertaken to reduce cost structures and improve cash flows such as
(1) mothballing one of its mini blast furnaces in Thailand where operations were severely
impacted by floods in the region and escalated raw material prices; (2) mothballing
approximately 1 mn tonnes of blast furnace capacity at Scunthorpe is in addition to the
closure of its downstream facility in Wales, catering to the construction segment, which
resulted in the elimination of around 70 jobs. The company may eliminate 2,500-3,000 jobs
(5-7% of the workforce). A cut in subcontracted labor will be over and above this number
and (3) close monitoring of all capex items spends including maintenance capex. Note that
Tata Steel had stepped up capex to US$600 mn a year starting FY2012. This number may be
recalibrated in view of the slowdown. We note that the company has taken several
initiatives over the past few years to make European operations competitive. Restructuring
and cost alignment during the previous downturn and similar initiatives currently will hold
the company in good stead and lead to stable performance in FY2013. Our EBITDA estimate
of US$28/tonne for TSE is conservative.
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