Tata Steel -Integrated domestic operations bode well in long run :: ICICI Securities, PDF link

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South East Asian operation disappoints…
• Indian operations reported steel sales volumes of 2.1 MT, up 3.5%
YoY (our estimate: 2.0 MT) whereas European operations reported
steel sales volumes of 3.4 MT (our estimate: 3.3 MT). On a
consolidated basis, total steel sales volumes for the group stood at
6.5 MT, higher than our estimate of 6.3 MT
• Due to higher-than-expected sales volume, topline was better than
our estimates. Tata Steel reported a consolidated net income from
operations of | 35777.1 crore (I-direct estimate: | 32863.6 crore)
• The consolidated EBITDA came in at | 3642.8 crore (EBITDA margin
of 10.2%), a decline of 14.7% QoQ, 1.7% YoY and lower than our
estimate of | 4100.5 crore
• EBITDA came in lower than estimates primarily due to the subdued
performance from South East Asian operation. During the quarter,
South East Asian operations reported an EBITDA loss of | 281 crore
vs. an EBITDA profit of | 129 crore in Q2FY14. The South East Asian
operations were under pressure due to a surge in low priced imports
and a decline in the rebar–scrap spread. Furthermore, during the
quarter, South East Asian operations made a provision to the tune of
| 240 crore on account of provision on doubtful advances. Adjusted
for that, South East Asian operations reported a loss at the EBITDA
level to the tune of | 41 crore
• EBITDA/tonne for Indian operations was at | 14664/tonne (our
estimate: | 15250/tonne) while EBITDA/tonne for European
operations came in at ~US$46/ tonne (our estimate: US$45/tonne)
• The consequent PAT came in at | 1254.3 crore (our estimate: | 533.5
crore). PAT came in notably higher on account of exceptional gain
primarily represented by the profit on sale of land at Borivali to the
tune of | 1146.9 crore
Integrated domestic operations bode well in long run
The company has access to captive raw materials (100% integration for
iron ore and ~40% integration for coking coal) for its existing capacity of
9.7 MT in India. This leads to the company realising superior EBITDA
margins among its domestic peers. On a sustainable basis, Tata Steel’s
Indian operations clocked an EBITDA/tonne of ~| 15000-15600/tonne,
notably higher than its peers.
European steel market in recovery mode
The European region is seeing the first signs of green shoots with three
major steel consuming sectors viz. auto, machinery and construction
showing signs of an improvement. European Federation (Eurofer) expects
a modest 2.6% increase in steel demand in Europe in CY14 (after five
consecutive years of decline in steel demand), which bodes well for the
company.
Indian operations stable; European operations perform well!
The Indian operations are expected to continue to provide stability of
earnings while its European business has reported operational efficiencies
in the last few quarters on a consistent basis. We have valued the
domestic operations at 6.5x FY16E EV/EBITDA and European operations
at 5x FY16E EV/EBITDA. We have arrived at a BUY recommendation on
the stock with a target price of | 540.

LINK
http://content.icicidirect.com/mailimages/IDirect_TataSteel_Q2FY15.pdf