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Tata Steel (TATA)
Downgrade to N: 4Q12 results in line, but outlook weak
EBITDA in line, but NPAT lower due to one-time accounting
changes and higher ETR
Steel markets continue to be tricky; volumes to aid India
business, but we see headwinds continuing
Downgrade to N (from OW); cut FY13/14 earnings estimates
and lower TP to INR450 (from INR500)
4Q12 results in line: Tata Steel reported standalone EBITDA of INR30bn (-2.5% y-o-y/
+13.1% q-o-q) and consolidated EBITDA of INR32bn (-28.8% y-o-y/+66.1% q-o-q), in line
with our estimates. Consolidated NPAT surprised on the negative at INR2bn (down c89.1% yo-
y) and c80% below our estimate due to: a) adoption of Accounting Standard 11, and b) ETR
of c82% due to losses at some European entities not being tax deductible. The company
reported FY12 net debt at USD8.9bn and a pension surplus of GBP211m (triennial valuations
underway, hence clearer picture of pension status will emerge over next two months).
New capacity at trial runs, but should contribute only 1mt in incremental volume this
year: Tata Steel communicated that it had started trial runs of the new 2.9mtpa Jamshedpur I
BF, but that it will only be able to produce an incremental 1mt from the facility. In addition,
the BF4 rebuild (closed for effectively four months) at Port Talbot will likely keep European
volumes subdued.
External headwinds continue: We mentioned in our January 2012 report Steel consumption
is slowing, not stopping, that with Chinese consumption slowing down, the Indian steel
industry will no longer be the same, both in terms of margins and valuations. We take note of
disappointing Chinese end user data (Exhibit 3), especially in the real estate and auto segments.
Besides, the weak data coincided with Chinese steel production reaching record highs of
c740mt (annualised) in late April.
We believe Tata Steel will have to deal with multiple issues: a) falling margins at the
incumbent India business (as expected, lower iron ore prices result in lower mining margins);
b) low margins at the expanded India business (as the facility is not as integrated as existing
one); and c) continued pressure at its European business.
Downgrade to N; lower TP to INR450: We lower our FY13/14 EBITDA estimates by
2% due to expectations of lower volumes at Tata Steel Europe and lower profitability at
the Indian operations, especially the incremental 1mt at Jamshedpur due to lower steel
price premiums and a higher cost structure. The impact is partly offset by INR weakness.
FY13/14 NPAT estimates are now 3%/6%, respectively, lower as we build in higher net
interest expenses. We roll forward our EV/EBITDA valuation to FY14 and now value the
European operations on EV/EBITDA at 5.0x (5.5x earlier). We derive a TP of INR450
and rate Tata Steel at Neutral (down from Overweight).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TATA)
Downgrade to N: 4Q12 results in line, but outlook weak
EBITDA in line, but NPAT lower due to one-time accounting
changes and higher ETR
Steel markets continue to be tricky; volumes to aid India
business, but we see headwinds continuing
Downgrade to N (from OW); cut FY13/14 earnings estimates
and lower TP to INR450 (from INR500)
4Q12 results in line: Tata Steel reported standalone EBITDA of INR30bn (-2.5% y-o-y/
+13.1% q-o-q) and consolidated EBITDA of INR32bn (-28.8% y-o-y/+66.1% q-o-q), in line
with our estimates. Consolidated NPAT surprised on the negative at INR2bn (down c89.1% yo-
y) and c80% below our estimate due to: a) adoption of Accounting Standard 11, and b) ETR
of c82% due to losses at some European entities not being tax deductible. The company
reported FY12 net debt at USD8.9bn and a pension surplus of GBP211m (triennial valuations
underway, hence clearer picture of pension status will emerge over next two months).
New capacity at trial runs, but should contribute only 1mt in incremental volume this
year: Tata Steel communicated that it had started trial runs of the new 2.9mtpa Jamshedpur I
BF, but that it will only be able to produce an incremental 1mt from the facility. In addition,
the BF4 rebuild (closed for effectively four months) at Port Talbot will likely keep European
volumes subdued.
External headwinds continue: We mentioned in our January 2012 report Steel consumption
is slowing, not stopping, that with Chinese consumption slowing down, the Indian steel
industry will no longer be the same, both in terms of margins and valuations. We take note of
disappointing Chinese end user data (Exhibit 3), especially in the real estate and auto segments.
Besides, the weak data coincided with Chinese steel production reaching record highs of
c740mt (annualised) in late April.
We believe Tata Steel will have to deal with multiple issues: a) falling margins at the
incumbent India business (as expected, lower iron ore prices result in lower mining margins);
b) low margins at the expanded India business (as the facility is not as integrated as existing
one); and c) continued pressure at its European business.
Downgrade to N; lower TP to INR450: We lower our FY13/14 EBITDA estimates by
2% due to expectations of lower volumes at Tata Steel Europe and lower profitability at
the Indian operations, especially the incremental 1mt at Jamshedpur due to lower steel
price premiums and a higher cost structure. The impact is partly offset by INR weakness.
FY13/14 NPAT estimates are now 3%/6%, respectively, lower as we build in higher net
interest expenses. We roll forward our EV/EBITDA valuation to FY14 and now value the
European operations on EV/EBITDA at 5.0x (5.5x earlier). We derive a TP of INR450
and rate Tata Steel at Neutral (down from Overweight).
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