Bright performance, but sustenance unlikely; maintain neutral Tata Steel :: Centrum

performance, but sustenance unlikely; maintain neutral
Tata Steel delivered bright operational performance across operations which
was well above our and street expectations. Consolidated EBITDA jumped
~37% YoY and stood at Rs43.7bn (margin of 12.8%) as domestic operations
saw higher expansion led volumes of 2.3MT and lower fixed costs which led to
EBITDA/tonne of Rs14500/tonne (up8% QoQ). European operations also
returned to positive EBITDA of US$33/tonne. We expect the sharp fall in global
steel prices to have an adverse effect on realizations and profitability going
ahead and do not foresee operational performance sustaining at higher levels
of Q4FY13. We revise our estimates upwards marginally for FY14E/15E. We
continue to maintain our subdued stance on the stock with 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. Maintain neutral.
 Standalone results improve from a trough: Domestic sales volume stood at ~2.28MT (up
~21% QoQ) backed by expansion at Jamshedpur. Realizations dropped by 5.3% QoQ on
account of pressure on domestic demand. Costs were lower on power & fuel and other
expenses (lower forex losses and royalty payments) which led to 8%QoQ increase in
EBITDA/tonne to ~Rs14500.
 Margin improves across operations: Cons. EBITDA stood at ~Rs43.7bn (up by ~37.4% YoY)
with a margin of 12.8% (well above our expectation of 9.6%). Margin improvement was
witnessed across operations with domestic operations having a margin of 31.2%
(EBITDA/tonne of ~US$267). European operations reported EBITDA/tonne of ~US$33 (well
above our exp of US$5/tonne). This was mainly due to the sharp fall in fixed and raw material
costs and higher volumes of 3.4 MT. South-East Asian operations had a margin of 6.4%
(EBITDA/tonne of ~US$52/tonne)

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 Analyst meet highlights and outlook: Guidance of 8.5 MT volumes in FY14E from
domestic operations was maintained. Domestic market has been stable but signs of
improvements are still missing. Volumes in Europe will remain under pressure due to low
demand but management expects to benefit from the recent commissioning of the repaired
BF at Port Talbot. Outstanding gross debt increased to ~Rs660bn due to incremental debt
funding for capex programs. Group capex guidance is maintained at ~US$2.5bn (with
~Rs90bn spent for expansion at Orissa for 3mtpa capacity in phase1) and interest and
depreciation costs will remain higher on account of capitalization of projects. International
raw material projects have seen further delays and lower production on account of
infrastructure issues.
 Earnings revised marginally higher: We maintain our volume and EBITDA estimates of
14MT and US$25/tonne for European operations in FY14E as we see benefit of lower coking
coal costs ahead. We increase our standalone EBITDA estimates by 2.2%/2.4 for FY14E/15E to
account for lower fixed costs and improved operational efficiency post expansion but
remain conservative on account of non-integration of new capacity for coking coal and
product mix skewed towards flat products. We revise our consolidated EBITDA estimates
upwards by 3.4%/4.2% for FY14E/15E.
 Maintain Neutral: We continue to value the company on SOTP basis with domestic
operations at 6x FY15E EV/EBITDA and Corus & South-East Asian subsidiaries at 4.5x FY15E
EV/EBITDA to arrive at a target price of Rs336. Maintain Neutral.