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Tata Steel (TATA)
Metals & Mining
The devil lies in the detail. Consolidated loss of Rs6 bn (our estimate was profit of
Rs1.6 bn) and EBITDA loss of US$147 mn at TSE (our estimate of US$64 mn) are the
headline disappointments. On closer scrutiny, US$143 mn of inventory write-down
(including raw materials) at TSE and high tax rates were the primary factors of the miss.
India business performance was solid. Financial performance of Tata Steel will improve
significantly starting 4QFY12E due to a combination of increase in steel prices and
lower raw material costs. We will review our estimates and TP post the earnings call.
Not that bad after all; standalone performance in line
Tata Steel reported standalone EBITDA of Rs26.3 bn, 8.6% ahead of our estimate but in line
making an adjustment for lower recognition of forex loss compared to our estimate. Note that
Tata Steel has adopted a policy of amortization of forex loss on long-term FX currency monetary
items over its tenor or March 2020, whichever is earlier. This resulted in lower-than-expected forex
charge of Rs170 mn on unhedged convertibles. EBITDA/tonne of Rs16,218 (US$318) declined
13.2% qoq. EBITDA was impacted by a 5.5% qoq increase in raw material cost; coking coal
increased by Rs2.73 bn (Rs1.73 bn higher cost and Rs1 bn of forex loss). Steel realization of
Rs51,676/ tonne was 5.4% ahead of our estimate. Steel shipments of 1,622 kt declined 1.7% qoq.
Consolidated loss of Rs6 bn courtesy inventory write-down by TSE and high tax payout
Tata Steel reported consolidated loss at PBT level of Rs153 mn. Tax provision of Rs6.7 bn was a
surprise and indicated that the company is not creating deferred tax asset on subsidiary losses.
Consolidated EBITDA of Rs17.2 bn declined 37.6% qoq and was impacted by inventory writedown
of Rs7.4 bn. Other subsidiaries reported EBITDA of US$25 mn, an improvement from the
loss of US$77 mn in 2QFY12. Pension surplus declined to GBP90 mn from GBP106 mn in 2QFY12.
TSE performance set to improve; markdown of inventories may aid subsequent quarter numbers
TSE reported loss at the EBITDA level of US$147 mn, which includes inventory write-down of
US$143 mn. Markdown is a result of decline in realizable value of finished product and raw
materials. In our view, average iron ore cost in 3QFY12 for TSE was US$160/tonne and coking coal
cost was US$255/tonne. Raw material inventory would have been marked down to US$140/tonne
and coking coal to US$220/tonne. With possible increase in realization in 4QFY12E and qoq
decline in raw material costs, profitability of TSE is set for a significant jump (theoretically can be as
high as US$50/tonne just on the basis of lower material costs) in 4QFY12E. TSE profitability may be
strong in 1QFY13E due to lag benefit of increase in finished steel prices. TSE has also undertaken
steps to improve competitiveness—this includes restructuring of long-product division involving
manpower reduction, move to intro-quarter pricing mechanism and other cost-control initiatives.
To review estimates post quarterly earnings call; performance set for
considerable improvement starting 4QFY12E
Likely increase in steel realization in Europe (prices are up EUR90/tonne last month) led by
easing liquidity and likely inventory restocking and higher domestic prices will boost overall
profitability starting the March 2012 quarter. Potential decline in raw material costs may be
an added sweetener. However, two negatives may weigh on the stock—(1) management
may guide down on India steel deliveries to 7.5-7.7 mn tonnes for FY2013E, lower than our
and consensus estimate of 8 mn tonnes and (2) the stock had a nice and sharp rally over the
past few days that may limit incremental gains.
We will review our estimates and target price post earnings call at 10:30 am IST on Feb 10.
Reports pension surplus of £90 mn
TSE reported pension surplus of £90 mn in 3QFY12 as against £106 mn in the previous
quarter. This partly addresses one of the biggest concerns of the Street. We acknowledge
that this surplus does not reflect the mark-to-market position of the pension assets and may
undergo change once a comprehensive triennial actuarial valuation exercise is done.
Composition of pension assets is weighed towards gilts and bonds which combined account
for 62% of pension assets of £10.4 bn. Investments in equities (29%), property/real estate
(6%) and cash account for the rest.
Conversion of warrants by promoters to generate a further Rs5.3 bn
Tata Sons, promoters of Tata Steel, exercised the option to convert outstanding 12 mn
warrants on January 20, 2012, increasing its stake in the company to 31.6% of the total
outstanding paid-up capital (30.7% earlier). This also resulted in cash infusion of the balance
amount of Rs5.3 bn (25% already paid on initial allotment of warrants).
Tata Steel continues to invest aggressively in various capacity expansion and raw material
projects. The company may spend around US$2 bn in each of the next two years. Tata
Steel’s balance sheet quality has improved over the past few quarters and can comfortably
manage leverage even if TSE does not generate any EBITDA over the next few quarters. We
note that part of the debt pertains to overseas raw material projects and greenfield
expansion in Orissa. Net debt at the end of 3QFY12 stood at US$9.5 bn as against US$8.8
bn at the end of 4QFY11
Highlights of 3QFY12 performance
�� Deliveries at Tata Steel’s South East Asian operations dipped sharply, falling 15.3% qoq to
0.66 mn tonnes. Lower deliveries and cost pressures translated into an EBITDA loss of
US$2 mn in the quarter. South East Asian operations were impacted by escalated raw
material prices and severe floods in Thailand which impacted and temporarily curtailed
production.
�� At Tata Steel India, flat product volumes gained 3% yoy to 940 kt in sync with increase in
production volumes. However, there was a 5.7% yoy decline in long product volumes to
682 kt which was attributable to lower availability of semis due to planned shutdowns
undertaken by the company.
�� Average steel realization of Rs51,676/tonne was up 3.8% qoq and exceeded our estimate
by 5.4%. Increased retail sales and favorable sales mix is the primary reason for the
higher-than-expected average steel realizations.
�� The 2.9 mtpa brownfield expansion in Jamshedpur is on track to commission operations
in 4QFY12E. Focus on value-added product mix would help address concerns on
overcapacity in the domestic market.
�� The Ferro Alloys and Minerals Division registered a sequential US$9/tonne growth in
operating profit to Rs1.5 bn on the back of higher ferro alloy sales and better realizations
driven by increased domestic market focus.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TATA)
Metals & Mining
The devil lies in the detail. Consolidated loss of Rs6 bn (our estimate was profit of
Rs1.6 bn) and EBITDA loss of US$147 mn at TSE (our estimate of US$64 mn) are the
headline disappointments. On closer scrutiny, US$143 mn of inventory write-down
(including raw materials) at TSE and high tax rates were the primary factors of the miss.
India business performance was solid. Financial performance of Tata Steel will improve
significantly starting 4QFY12E due to a combination of increase in steel prices and
lower raw material costs. We will review our estimates and TP post the earnings call.
Not that bad after all; standalone performance in line
Tata Steel reported standalone EBITDA of Rs26.3 bn, 8.6% ahead of our estimate but in line
making an adjustment for lower recognition of forex loss compared to our estimate. Note that
Tata Steel has adopted a policy of amortization of forex loss on long-term FX currency monetary
items over its tenor or March 2020, whichever is earlier. This resulted in lower-than-expected forex
charge of Rs170 mn on unhedged convertibles. EBITDA/tonne of Rs16,218 (US$318) declined
13.2% qoq. EBITDA was impacted by a 5.5% qoq increase in raw material cost; coking coal
increased by Rs2.73 bn (Rs1.73 bn higher cost and Rs1 bn of forex loss). Steel realization of
Rs51,676/ tonne was 5.4% ahead of our estimate. Steel shipments of 1,622 kt declined 1.7% qoq.
Consolidated loss of Rs6 bn courtesy inventory write-down by TSE and high tax payout
Tata Steel reported consolidated loss at PBT level of Rs153 mn. Tax provision of Rs6.7 bn was a
surprise and indicated that the company is not creating deferred tax asset on subsidiary losses.
Consolidated EBITDA of Rs17.2 bn declined 37.6% qoq and was impacted by inventory writedown
of Rs7.4 bn. Other subsidiaries reported EBITDA of US$25 mn, an improvement from the
loss of US$77 mn in 2QFY12. Pension surplus declined to GBP90 mn from GBP106 mn in 2QFY12.
TSE performance set to improve; markdown of inventories may aid subsequent quarter numbers
TSE reported loss at the EBITDA level of US$147 mn, which includes inventory write-down of
US$143 mn. Markdown is a result of decline in realizable value of finished product and raw
materials. In our view, average iron ore cost in 3QFY12 for TSE was US$160/tonne and coking coal
cost was US$255/tonne. Raw material inventory would have been marked down to US$140/tonne
and coking coal to US$220/tonne. With possible increase in realization in 4QFY12E and qoq
decline in raw material costs, profitability of TSE is set for a significant jump (theoretically can be as
high as US$50/tonne just on the basis of lower material costs) in 4QFY12E. TSE profitability may be
strong in 1QFY13E due to lag benefit of increase in finished steel prices. TSE has also undertaken
steps to improve competitiveness—this includes restructuring of long-product division involving
manpower reduction, move to intro-quarter pricing mechanism and other cost-control initiatives.
To review estimates post quarterly earnings call; performance set for
considerable improvement starting 4QFY12E
Likely increase in steel realization in Europe (prices are up EUR90/tonne last month) led by
easing liquidity and likely inventory restocking and higher domestic prices will boost overall
profitability starting the March 2012 quarter. Potential decline in raw material costs may be
an added sweetener. However, two negatives may weigh on the stock—(1) management
may guide down on India steel deliveries to 7.5-7.7 mn tonnes for FY2013E, lower than our
and consensus estimate of 8 mn tonnes and (2) the stock had a nice and sharp rally over the
past few days that may limit incremental gains.
We will review our estimates and target price post earnings call at 10:30 am IST on Feb 10.
Reports pension surplus of £90 mn
TSE reported pension surplus of £90 mn in 3QFY12 as against £106 mn in the previous
quarter. This partly addresses one of the biggest concerns of the Street. We acknowledge
that this surplus does not reflect the mark-to-market position of the pension assets and may
undergo change once a comprehensive triennial actuarial valuation exercise is done.
Composition of pension assets is weighed towards gilts and bonds which combined account
for 62% of pension assets of £10.4 bn. Investments in equities (29%), property/real estate
(6%) and cash account for the rest.
Conversion of warrants by promoters to generate a further Rs5.3 bn
Tata Sons, promoters of Tata Steel, exercised the option to convert outstanding 12 mn
warrants on January 20, 2012, increasing its stake in the company to 31.6% of the total
outstanding paid-up capital (30.7% earlier). This also resulted in cash infusion of the balance
amount of Rs5.3 bn (25% already paid on initial allotment of warrants).
Tata Steel continues to invest aggressively in various capacity expansion and raw material
projects. The company may spend around US$2 bn in each of the next two years. Tata
Steel’s balance sheet quality has improved over the past few quarters and can comfortably
manage leverage even if TSE does not generate any EBITDA over the next few quarters. We
note that part of the debt pertains to overseas raw material projects and greenfield
expansion in Orissa. Net debt at the end of 3QFY12 stood at US$9.5 bn as against US$8.8
bn at the end of 4QFY11
Highlights of 3QFY12 performance
�� Deliveries at Tata Steel’s South East Asian operations dipped sharply, falling 15.3% qoq to
0.66 mn tonnes. Lower deliveries and cost pressures translated into an EBITDA loss of
US$2 mn in the quarter. South East Asian operations were impacted by escalated raw
material prices and severe floods in Thailand which impacted and temporarily curtailed
production.
�� At Tata Steel India, flat product volumes gained 3% yoy to 940 kt in sync with increase in
production volumes. However, there was a 5.7% yoy decline in long product volumes to
682 kt which was attributable to lower availability of semis due to planned shutdowns
undertaken by the company.
�� Average steel realization of Rs51,676/tonne was up 3.8% qoq and exceeded our estimate
by 5.4%. Increased retail sales and favorable sales mix is the primary reason for the
higher-than-expected average steel realizations.
�� The 2.9 mtpa brownfield expansion in Jamshedpur is on track to commission operations
in 4QFY12E. Focus on value-added product mix would help address concerns on
overcapacity in the domestic market.
�� The Ferro Alloys and Minerals Division registered a sequential US$9/tonne growth in
operating profit to Rs1.5 bn on the back of higher ferro alloy sales and better realizations
driven by increased domestic market focus.
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