Tata Steel -TP: INR224 Sell: Motilal oswal,

Net debt at INR524b; translation gains, asset sales drove net worth
Takeaways from FY12 Annual Report
 Despite free cash flows of INR22b, net debt increased 5% to INR524b.
 Net worth increased by INR77b largely due to asset sales and asset translation gains.
 EPS adjusted for payout on hybrid perpetual securities 11% lower than reported EPS.
 Outlook not very encouraging; maintain Sell.

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Despite free cash flows of INR22b, net debt increased 5% to INR524b
Operating cash flows were up significantly due to working capital release in FY12
against large increase in FY11. Also, half of the INR120b capex was funded by
asset sales. Despite free cash flows of INR22b, net debt increased 5% to INR524b.
Net worth driven by asset sales and translation gains, not by business profit
The net worth of the Tata Steel group increased by INR77b to INR433b largely due
to equity infusion, asset sales, goodwill and asset translation gains. Core profit
from India business after paying dividend contributed INR47b, but this was offset
by INR42b of after tax loss in overseas operations. Actuarial loss of INR24b in
overseas business had an erosive impact on net worth.
Adjusted EPS 11% lower than reported EPS
EPS adjusted for the distribution expense of INR2.25b towards hybrid perpetual
securities (HPS) was INR18.6, 11% lower than reported EPS. From the common
shareholder’s perspective, HPS is debt and the interest in the form of distribution
expense should be adjusted against EPS.
Other highlights
 The management highlighted that Tata Steel Europe (TSE) is under enormous
stress due to prolonged recession in Europe. Stricter environmental norms
ahead will increase costs. The covenants on acquisition debt are also
concerning.
 Full commissioning of the Jamshedpur Brownfield expansion is delayed by
further three months. Poor 1QFY13 volumes and project delays have put the
guidance of 1m tonnes of incremental volumes in FY13 at risk, in our view.
 Coking coal shipments have started from Mozambique in June 2012. Iron ore
shipments from Canada are likely to start in 4QFY13.
Outlook not very encouraging
 Significant cost increases on account of power, freight, iron ore, etc for India
operations are sticky in nature. For TSI (Tata Steel India), the increase in
revenue in FY12, driven by volumes and prices, was offset by increase in
costs.
 TSE not only faces the challenge to deal with the steel price and raw material
cost squeeze, but also rising specific fixed costs due to production loss.