Tough times continue, maintain sell Tata Steel :: Centrum

Tough times continue, maintain sell
Tata Steel reported consolidated PAT loss of ~Rs3.6bn as performance across operations
worsened on account of severe realisations drop amidst demand crunch. Consolidated
EBITDA dropped ~32% QoQ and stood at Rs23bn (margin of 6.8%, down by 330 bps QoQ) as
domestic operations witnessed sharp fall of 5.8% in sequential realisations and continued to
see higher operational costs resulting in standalone EBITDA margin of 27.9%, the lowest in
the past 14 qtrs. We expect the sequential fall in realizations to continue albeit at a lower clip
and expect overall profitability to remain under pressure going forward. We revise our
estimates lower further and remain well below consensus with our continued negative stance
on the European operations, lower margin profile in domestic operations on reduced
backward integration post expansion and high interest costs on account of the large debt
pile. We maintain sell with a revised lower target price of Rs330.
Standalone results worsen due to sustained higher costs: Domestic sales volume stood at
~1.7MT and realizations dropped by 5.8% QoQ on account of pressure on domestic demand,
high imports and falling global steel prices. Costs remained high on power & fuel, freight and
other expenses which led to lowest EBITDA/tonne of ~Rs14500 in standalone business since
Q3FY10.
Margin pressure across operations: Cons. EBITDA stood at ~Rs23bn (down by ~32% QoQ
and 16% YoY) with a margin of 6.8% (well below our expectation of 9.1%). Margin pressure
was witnessed across operations with domestic operations having a margin of 27.9%
(EBITDA/tonne of ~US$263), European operations reported negative EBITDA/tonne of ~US$2
and South-East Asian operations had a margin of 0.6% (EBITDA/tonne of ~US$5/tonne). This
was mainly due to the sharp fall in realizations and we see realizations in Europe and domestic
markets remaining under pressure in H2FY13 on account of slow industrial activity and
lacklustre demand, lower raw material prices and import pressure from China & CIS markets.

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Conference call highlights and outlook: Guidance of incremental volume of ~1MT in FY13E
from 2.9mtpa expansion was maintained and the company targets to exit FY13E near full
capacity of 9.7mtpa. Costs were higher in domestic operations due to outside coke purchase
and high power costs but are expected to come down post new coke oven battery
installations in Q4FY13E. Volumes in Europe will remain under pressure due to low demand
and the holiday season ahead but management expects to maintain flat volumes for FY13E.
Steel prices are under pressure in all markets and are expected to be lower sequentially going
ahead but higher fall seen in Q2FY13 could lead to lower fall in Q3FY13E. Outstanding net
debt increased to ~US$10.4bn due to incremental debt funding for capex programs.
European operations pension funds triennial revaluation has been completed and a deficit of
GBP 500mn has been established which would be recovered over a 15 year period and involve
minimum cash outflows in initial few years. We revise our volume estimates slightly higher for
European operations to 13.5 MT of sales volume but lower EBITDA/tonne of US$15 in FY13E.
We maintain our standalone volume estimates but expect lower EBITDA margin of
29.6%/30.3% in FY13E/14E as integration on the coking coal front would drop post expansion
and product mix will get skewed towards flats, keeping overall realizations lower than before.
We revise our consolidated EBITDA estimates lower by 7.2%/4.9% for FY13E/14E.
Maintain Sell: We value the company on SOTP basis with domestic operations at 5.5x FY14E
EV/EBITDA and Corus & South-east Asian subsidiaries at 4.5x FY14E EV/EBITDA to arrive at a
target price of Rs330. Maintain Sell.