Tata Sponge - Deep value play, reiterate Buy :: Centrum

Deep value play, reiterate Buy
We see deep value in Tata Sponge (TSL) with cash at ~90% of current mcap and
core sponge iron business generating positive free cash flow along with robust
return ratios on account of high utilization, superior quality product and captive
waste heat power. We see valuations at 0.8x FY14E EV/EBITDA as unduly
overstating concerns on core business profitability and usage of free cash on
books. Even our highly stressed bear case throws a fair value of Rs380 for the
stock, an upside of ~20%. We reiterate Buy on the stock with a TP of Rs490, an
upside of ~55% (based on 60:40 probabilities for our base and bear cases).
Higher sponge iron price drives strong earnings show in Q3 despite one-offs:
During Q3FY14, TSL’s sponge iron realizations went up by ~10% QoQ and coupled
with lower iron ore costs resulted in strong EBITDA of Rs403mn (up ~84% QoQ),
margin of 20.3%. TSL incurred one-off expense of ~Rs140mn (Rs80mn in interest
costs and Rs60mn in other expenses) related to inter-state tax demand from income
tax department during the quarter and posted PAT of Rs243mn (up 33% QoQ).
Coal block faces de-allocation threat; to remove market concern on cash use:
TSL’s coal block (Radhikapur East) is faced with a real threat of de-allocation post
recent developments which indicate that blocks without any major clearances
could be de-allocated by the Supreme Court. TSL has spent ~Rs1.9bn for coal block
development (Rs1.7bn paid as advance to state government for land acquisition)
but does not have any major clearance yet. We believe that possible de-allocation
of coal block will help in removing investor concerns on usage of high cash on
books (~Rs4.3bn) to a large extent. Management expects return of advance paid in
some form in the event of de-allocation which will increase its cash pile further.
Return ratios adjusted for coal block investment robust: Return ratios for the
company (refer exhibit 2) remain strong (after adjusting for ~Rs1.7bn of advances
paid for the coal block) despite the very large cash pile (~Rs290/share as on Dec’13).
TSL’s core business of sponge iron manufacture is very robust in our view (no
PAT/EBITDA loss in the past 15 years across steel down cycles). Strength in import
landed scrap prices augurs well for sponge iron business of TSL which is expected
to continue generating positive free cash flows and earnings.
Valuations and risks: The stock trades at extremely low valuation of 0.8x FY14E
EV/EBITDA and 5.9x FY14E P/E. The core business has sound fundamentals and
generates positive free cash flows. Current cash at ~90% of mcap along with
dividend yield of ~3% are added positives. We reiterate Buy with a target price of
Rs490 and view Tata Sponge as an ideal investment for long term value investors.
Key risks include higher iron ore costs and drop in sponge iron prices.

Book Profits - Tata Sponge - Value Pick- Anand Rathi

Tata Sponge – Value Pick was initiated on 20^Th Jan 2012 at a price of 253. CMP is 339, total returns of 34% till date.

Currently there is also Open offer, where promoters are interested to raise their stake.

Therefore we suggest the investors to tender to the open offer which is at a price of Rs. 375 which is at a good premium.

Recently the company also gave a good dividend of Rs. 8 which shows a total return of 37% till date on our call. We suggest clients to book profits/ tender to the open offer as we would like to close our call.

Pending Calls that look good to reach targets…

Angel Broking - Tata Sponge Iron - RU4QFY2012 - Result Updates - PDF link

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Tata Sponge Iron - RU4QFY2012

Buy Tata Sponge Iron (TSIL) :: 2QFY2012 Result Update :: Angel Broking

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Tata Sponge Iron Ltd. (TSIL) reported marginally lower revenue on a yoy basis at
`174cr in 2QFY2012 as compared to `176cr in 2QFY2011 on the back of
hampered sponge iron production due to iron ore supply issues. This was partially
offset by increased sponge iron realization. However, EBITDA margin expanded
by 802bp yoy from 9.2% in 2QFY2011 to 17.2% in 2QFY2012 on account of a
decline in raw-material cost as a percent of sales. PAT increased by 109% yoy to
`22cr in 2QFY2012 as compared to `10cr in 2QFY2011. We continue to
maintain our Buy recommendation on the stock.
Increased volumes to aid revenue growth: We expect TSIL to post a 16% CAGR in
its revenue over FY2011-13E to `794cr in FY2013E due to resumption in sponge
iron production and sales volume. The company gets assured supply of iron ore
from Tata Steel, which insulates it from the price volatility in the spot market. TSIL
has a 45% stake in Talcher coal block in Radhikapur, with estimated reserves of
120mn tonnes. Progress on the pending forest clearance for the block could be a
trigger for the stock.
Outlook and valuation: We expect TSIL to post a 16% CAGR in its revenue over
FY2011-13E, while its EBITDA margin is expected to contract by 508bp from
22.2% in FY2011 to 17.1% in FY2013 due to increasing raw-material costs. PAT
is expected to decline to `92cr in FY2013E from `101cr in FY2011. The stock is
trading at a PE of 5.1x FY2013E earnings and P/B of 0.7x for FY2013E.
We maintain our Buy recommendation on the stock with a target price of `382,
based on a target P/B of 0.9x for FY2013E

Tata Sponge Iron (CMP: `310/ TP: `382/ Upside: 23%) :: Angel Model Portfolio: November 2011

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􀂄 Tata Sponge Iron (TSIL) is an associate company of Tata Steel, which holds a 39.7%
stake in the company. TSIL is a leading manufacturer of sponge iron, which is used
as a raw material in steel manufacturing, with an installed capacity of 3,90,000
tonnes per annum and a 26MW captive power plant.
􀂄 The company has a long-term supply agreement with Tata Steel for assured supply
of iron ore for uninterrupted production.
􀂄 TSIL has a 45% stake in Talcher coal block in Orissa with estimated reserves of
120mn tonnes for captive consumption. The company has deposited money for
the first phase of land acquisition with the Orissa government. Forest clearance for
the block is pending.
􀂄 At the CMP of `310, the stock is trading at PE of 5.2x its FY2013E earnings and
P/B of 0.7x for FY2013E. The company is debt free with cash reserves of `221cr
and RoIC of 44% for FY2013E. We maintain our Buy rating on the stock with a
target price of `382, based on a target P/B of 0.9x for FY2013E.

Tata Sponge Iron; TP:INR440 Buy :: Motilal oswal,

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 Adjusted PAT for 2QFY12 declined 4% QoQ (6% YoY) to INR217m, below our estimate of INR224m on account of
lower sponge iron production. Sponge iron production was down 1% QoQ (30% YoY) to 71,000 tons, as iron ore
supply was impacted by local issues.
 Net sales grew 19% QoQ (down 1% YoY) to INR1.74b while realizations increased 23% QoQ to INR22,397/ton.
 EBITDA decreased 10% QoQ (13% YoY) to INR299m while EBITDA/ton declined 8% QoQ to INR4,206.
 Despite significantly lower production and sales volumes, strong sponge iron realizations are supporting both revenue
and margins. Current sponge iron prices are at a 3-year high in the domestic market. Mining ban in Karnataka and
regulatory rigor in the Barbil region has affected supply of iron ore to the industry.
 We expect sponge iron production to be significantly lower at 300kt (v/s 383kt in FY11) due to iron supply issues.
We have cut our FY12 volume estimate from 355kt to 300kt, reducing our FY12 EPS estimate by 4%.
 Radhikapur (East) coal block is on track. Coal production is likely to start in 2013.
 The stock trades at an attractive EV of 2.1x FY12E EBITDA and 5.6x FY12E EPS. Maintain Buy.

Tata Sponge Iron (CMP: `303/ TP: `429/ Upside: 42%):: Angel Broking Picks for September 2011

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􀂄 Tata Sponge Iron Ltd. (TSIL) is an associate company of Tata Steel, which holds a
39.7% stake in the company. TSIL is a leading manufacturer of sponge iron, which
is used as a raw material in steel manufacturing, with an installed capacity of
3,90,000mtpa and a 26MW captive power plant.
􀂄 The company gets 100% supplies of iron ore from Tata Steel with a 20-25% discount
from market prices, thus leading to at least 5% higher margins from other
non-integrated sponge iron players.
􀂄 TSIL has a 45% stake in Talcher coal block in Orissa with estimated reserves of
120mn tonnes for captive consumption. The company has deposited money for
the first phase of land acquisition with the Government of Orissa. Forest clearance
for the block is pending.
􀂄 At the CMP of `303, the stock is trading at PE of 4.2x its FY2013E earnings and
P/B of 0.7x for FY2013E. The company is debt free with cash reserves of `299cr
and RoIC of 62.2% for FY2013E. We maintain our Buy view on the stock with a
target price of `429 and a target P/E of 6x for FY2013E.

Tata Sponge Iron ( TP: `429/ Upside: 38%):Angel Broking, TOP PICKS

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􀂄 Tata Sponge Iron (TSIL) is an associate company of Tata Steel, which holds a 39.7%
stake in the company. TSIL is a leading manufacturer of sponge iron, which is used
as a raw material in steel manufacturing, with an installed capacity of 3,90,000mtpa
and a 26MW captive power plant.
􀂄 The company gets 100% supplies of iron ore from Tata Steel with a 20-25% discount
from market prices, thus leading to at least 5% higher margins from other
non-integrated sponge iron players.
􀂄 TSIL has a 45% stake in Talcher coal block in Orissa, with estimated reserves of
120mn tonnes for captive consumption. The company has deposited money for
the first phase of land acquisition with the Government of Orissa. Forest clearance
for the block is pending.
􀂄 At the CMP of `311, the stock is trading at PE of 4.4x its FY2013E earnings and
P/B of 0.7x for FY2013E. The company is debt free with cash reserves of `299cr
and RoIC of 62.2% for FY2013E. We maintain our Buy view on the stock with a
target price of `429 and a target PE of 6x for FY2013E

KIFS Result update of IndusInd Bank,VST Ind,TTK Prestige,Tata Sponge,DCB

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INDUS IND BANK

OVERVIEW

IndusInd Bank Limited is a new generation bank set up in 1994. The bank offers commercial, transactional and electronic banking products and services. IndusInd Bank has 326 branches, 633 ATMs spread across 225 geographic locations of the country as on June 30, 2011. Indus Ind plans to take the branch network to 550 by FY 13. Despite significant expansion in network /infrastructure, the cost to income ratio has remained favourable- Y-O-Y, resulting in better RoA.

Key highlights:

· Total income grew by 48% Y-o-Y to Rs.1380 cr. v/s Rs. 933 cr in June-10

· Operating Profit grew by 35% Y-o-Y to Rs. 312 cr.  v/s Rs. 231 cr in June-10

· Net profit grew by 52% Y-o-Y to Rs. 180 cr.  v/s Rs. 119 cr in June-10

· Gross NPA’s fell by 18 bps Y-o-Y to 1.08%  v/s 1.26% in June-10

· Net NPA’s fell by 8 bps Y-o-Y to 0.30%  v/s 0.38% in June-10

VST INDUSTRIES

OVERVIEW

VST Industries is engaged in tobacco and related products business. The Company has sales in India and outside India. Its products include cigarettes, unmanufactured tobacco, cut tobacco and other articles of paper and paper board. The major brands of the company include Charminar, Charminar Special Filter, Charms Mini Kings and Charms Virginia Filter, XL Filter and Shaan. Its products are targeted at the lower end of the market and have dominance in the small-sized (less than 60 mm) micro segment. Though the major chunk of revenue comes from sale of cigarettes, it is also in the business of selling non-manufactured and cut tobacco.

Key highlights:

· Total income  grew by 16% Y-o-Y to Rs. 147 cr. v/s Rs. 127 cr in June-10

· Operating Profit grew by 99% Y-o-Y to Rs. 55 cr.  v/s Rs. 28 cr in June-10

· OPM grew by 659 bps Y-o-Y to 14.97%  v/s 8.38 % in June-10

· Net profit grew by 90 % Y-o-Y to Rs. 34 cr.  v/s Rs. 18 cr in June-10

· NPM grew by 387 bps Y-o-Y to 9.35 %  v/s 5.48 % in June-10

TTK PRESTIGE

OVERVIEW

TTK Prestige is leading manufacture of Pressure cookers in India and offered the most comprehensive range of kitchenware in the world. With products and facilities that enjoy international accreditations, the company enjoys a presence in over 4,00,000 retail outlets across the country. Pressure cookers, toys, ready to fry foods; ball pens and cartography encompass some of the products the company pioneers and deals in. Promotional campaigns like ‘happy exchanges   offer’ and have won regional awards.

Key highlights:

· Total income  grew by 60% Y-o-Y to Rs. 233 cr. v/s Rs. 145 cr in June-10

· Operating Profit grew by 59% Y-o-Y to Rs. 38 cr.  v/s Rs. 24 cr in June-10

· OPM grew by 10 bps Y-o-Y to 16.25%  v/s 16.15% in June-10

· Net profit grew by 58% Y-o-Y to Rs. 25 cr.  v/s Rs. 16 cr in June-10

· NPM grew by 2 bps Y-o-Y to 10.87%  v/s 10.85% in June-10

TATA SPONGE IRON

OVERVIEW

The company is engaged in business of manufacturing high-grade sponge iron that is consistent in quality.  The company has an annual manufacturing capacity of 390,000 tonnes of sponge iron from its three kilns. Its production plant is situated at Bilaipada in Orissa. The company also operates a modern R&D facility that is set up along with a chemical laboratory to conduct the monitoring process. This R& D facility introduced Tisco Direct Reduction (TDR) -- an innovative technology for making sponge iron.

Key highlights:

· Total income falls by 2% Y-o-Y to Rs. 138 cr. v/s Rs. 141 cr in June-10

· Operating Profit falls by 31% Y-o-Y to Rs. 30 cr.  v/s Rs. 44 cr in June-10

· OPM falls by 907 bps Y-o-Y to 21.7% v/s 30.77% in June-10

· Net profit falls by 13% Y-o-Y to Rs. 23 cr.  v/s Rs. 26 cr in June-10

· NPM falls by 200 bps Y-o-Y to 16.31%  v/s 18.31% in June-10

DCB

OVERVIEW

DCB Bank is a modern emerging new generation private sector bank with 82 branches with approximately 450,000 customers.  DCB’s business models focuses on achieving a balance between Retail Mortgages, Micro SME (MSME), SME, Agri/Microfinance and mid-corporates. DCB Bank access to low cost deposits from operations spread mainly in Maharashtra, Gujarat and AP and the bank has a continued focus on building a low cost deposit franchise with strong capital position.

Key highlights:

· Total income grew by 24% Y-o-Y to Rs.185 cr. v/s Rs. 150 cr in June-10

· Operating Profit fell by 27% Y-o-Y to Rs. 17 cr.  v/s Rs. 23 cr in June-10

· Net profit grew by a whopping 403% Y-o-Y to Rs. 9 cr.  v/s loss of Rs. 3 cr in June-10

· Gross NPA’s fell by 257 bps Y-o-Y to 5.90%  v/s 8.47% in June-10

· Net NPA’s fell by 133 bps Y-o-Y to 1.19%  v/s 2.52% in June-10

Tata Sponge:: Angel Broking Top Pick: June 2011

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TSIL, a manufacturer of sponge iron, has an installed capacity
of 3,90,000MTPA and a 26MW captive power plant. The
company plans to expand its captive power plant capacity by
25MW to 51MW over a period of 2-3 years. TSIL gets 100%
supplies of iron ore from Tata Steel at subsidised rates. TSIL is a
cash-rich company with ROIC of ~65% for FY2012E. We
recommend Buy on TSIL with a target price of `469, based on
target P/B of 1.2 and implied P/E of 6.5 for FY2012E. These
valuations do not include the 45% stake in Talcher coal block in
Orissa (estimated reserves of 120mn tonnes for captive
consumption), which may lead to further upsides.
Assured supply of iron ore through Tata Steel to give higher
margins as compared to peers: TSIL has a long-term supply
agreement with Tata Steel for assured supply of iron ore for
uninterrupted production. Tata Steel supplies iron ore from its
Khondbond mine in Orissa, at a 20-25% discount from the
market price, leading to at least 5% higher operating margin
from other non-integrated sponge players.

Cost efficiency due to higher capacity utilization compared to
industry: TSIL operates at a capacity utilization of c88% compared
to the industry average of 66% which makes is most efficient in
terms of maintaining its costs which also contributes to its EBITDA
margins being higher compared to peers.
Stake in coal block can drive further upsides: TSIL has a 45%
stake in Talcher coal block in Orissa, which has estimated reserves
of 120mn tonnes for captive consumption, in which forest
clearance is pending. The company sources ~60% of its raw
material from Coal India and imports the remaining from Africa.
TSIL has received environmental clearance for the coal block
and, in FY2010, deposited `97cr with the Government of Orissa
for acquisition of part of the land. Progress on forest clearance
could be a potential trigger for the stock.
Substantially high return ratios due to lower cost of iron ore:
TSIL reported ROIC of ~65% for FY2011, exceptionally higher
than other industry players, driven by lower iron ore cost. We
expect the company's ROIC to be maintained at to ~65% in
FY2012E, driven by higher sponge iron prices. The company is
forcasted to have net cash of ~`236cr by FY2012E end.


Outlook and valuation: We maintain Buy on TSIL because of its
low valuations, with a revised target price of `469, an upside of
33% from current levels. At the CMP of `354, the stock is trading
at P/E of 4.9x its FY2012E and P/B of 0.9 for FY2012E. These
valuations do not include investment in the coal block, since it is
expected to commence after FY2012; however, it could provide
a potential upside to the stock.

Buy Tata Sponge Iron: Missing growth --Motilal Oswal

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Missing growth
 Tata Sponge (TTSP) has its manufacturing facility at Bilaipada near Joda in the
Keonjhar district of Orissa. It has sponge iron production capacity of 390,000tpa
(3 kilns; 2x120ktpa and 1x150ktpa) and a 26MW captive power plant based on
waste heat recovery from its kilns.
 Its power facilities are adequate to meet its captive needs and it sells ~70% of the
power generated to the state electricity grid at notified rates.
 TTSP's plant is ideally located in close proximity to iron ore mines (25km from
plants) and sponge iron consumers in the eastern region, which helps to save
transportation costs. The company's strategic tie-up with Tata Steel secures its
iron ore requirement in future years. Tata Steel's Khondbond mine in Orissa supplies
iron ore to TTSP largely on long-term pricing basis.
 TTSP imports ~35% of its coal requirement for blending with inferior grade domestic
coal. It sources the balance 65% through linkage and e-auction from Coal India.
Its average coal cost is Rs4,000-4,500 per ton.
 To get coal with ash content less than 22% from diverse sources remains a
challenge. In FY10, TTSP imported ~200k tons of coal from South Africa.
 Development of Radhikapur (East) captive coal block in Talcher coal fields, Orissa
is underway. Environment clearance has been obtained. About 2,500 acres of land
has been allotted. However, the company still does not have possession of the
land. So far, TTSP has paid Rs1.1b towards the coal mines. Forest clearance is
still pending. Total cost of developing the mine will be nearly Rs5b. The coal block
has reserves of 115m tons and TTSP's share is ~50m tons. Scaw industries and
SPS Sponge are the other joint allottees. TTSP will be the leader and invest 100%
of the project cost. Coal will be supplied to the joint allottees at cost plus fixed
return on investment.
 TTSP is planning to add another 25MW captive power plant at the existing location,
which will use unburnt coal from the sponge iron kiln.
 TTSP is one of the best managed sponge iron plants in the country. Its location in
Barbil is of strategic advantage in sourcing iron ore. The arrangement with Tata
Steel helps in sourcing iron ore at reasonable long-term prices. It has a strong
balance sheet with surplus cash (Rs1.3b) and consistent track record of paying
dividend (80%). Valuations are attractive. The stock trades at 5.2x FY12E EPS
and at an EV of 2.1x FY12E EBITDA. Maintain Buy.

Tata Sponge Iron: Buy ::Business Line

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In a volatile pricing environment for steel, low leverage and high levels of integration provide a good margin of safety for profits. One such company, Tata Sponge Iron, appears to be an attractively priced bet at Rs 317 or 5.6 times trailing twelve month earnings. Captive power, long-term arrangements for iron ore with parent Tata Steel and a 45 per cent stake in coal mines that are to be commissioned in 2013 provide the company with room to manoeuvre and possibly bolster margins over the next two fiscals.

While the company's valuation is on a par with peers such as Prakash Industries and MSP Steel and Power, higher levels of capacity utilisation and tight operations with mines in close vicinity compared with peers make Tata Sponge Iron a preferred play in the sponge iron space.

BUSINESS

Tata Sponge Iron has the capacity to produce around 3.3 lakh tonnes of sponge iron at a facility in Orissa. Sponge iron is an intermediate in the production of steel and is utilised by secondary steel producers in arc furnaces as a complement to scrap.

Utilising sponge iron as an input for steel production has a host of advantages, including a more optimal composition of ‘furnace' input and lesser dependence on imported scrap whose supply and prices are more volatile. Just under 44 per cent of the company is controlled by Tata Steel and Tata Sons. The company operated at 92 per cent utilisation levels in the last fiscal, maintaining this in the current fiscal too.

Sales and net profits have grown at 37 and 14 per cent to Rs 485 crore and Rs 58 crore, respectively, over the first nine months of FY11 compared with the same period last fiscal.

The company has seen no capacity additions since 2007. Net sales have moved from Rs 455 crore in FY08 to Rs 520 crore in FY10.

Net profits have moved from Rs 96 crore to Rs 85 crore, thanks to a higher raw material bill which has outpaced sponge-iron realisations. Operating margins have hovered between 28 per cent (in the most recent fiscal) and 37 per cent.

However, favourable dynamics for sponge iron prices with increasing demand from steel alloy producers (who operate utilising arc furnaces) is likely to work in the company's favour, enabling it to enjoy operating margins of 15-20 per cent.

Working in favour of the company's net profit margins is the fact that there is no debt to service and stable depreciation expenses. This should also serve the company well in its effort to bring its coal mines on-stream.

Around 25 km from its Orissa plant are the iron ore mines the company has leased to parent Tata Steel. These mines supply the company with high-quality iron ore at rates considerably lower than those in the spot markets.

Similarly, the company has a 45 per cent stake in a venture that been allotted coal mines with reserves of around 120 million tonnes. Bringing these coal mines on-stream by FY13 will be a key move for margin expansion as the company's coal bill accounts for 60 per cent of raw material costs.

PRICE OUTLOOK

Sponge iron prices are up around 25 per cent over the last three months tracking steel prices, which are up as a result of the spike in input costs.

With several evolving supply side constraints for steel scrap, including curtailed exports from Russia (third largest exporter mulling a ban) and Japan (the second largest scrap exporter), there is the possibility of increased demand for sponge iron, driving up prices.

This is despite falling iron ore prices as secondary steel producers turn to an increasing proportion of sponge iron as a furnace input.

The major challenges for the company include the substantial hike in input costs as Coal India increased prices of high-grade coal by 30 per cent last month

Tata Sponge Iron: Expect margin expansion in 2HFY11- Buy: Motilal Oswal

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 Tata Sponge's 2QFY11 adjusted PAT grew 52% YoY to Rs246m (up 111% QoQ) due to better operating performance
and higher sponge iron prices. Reported PAT was Rs104m, affected by an iron ore price hike of Rs142m pertaining to
1QFY11.
 Sponge iron production increased 15% YoY to 101,400 tons. The company achieved record capacity utilization of
104% due to strong demand and improved operating performance.
 Net sales grew 47% YoY to Rs1.76b (up 24% QoQ) due to higher sponge iron volumes and realizations. Sponge
sales volumes increased 32% YoY to 108,000 tons and average realization was up 14% YoY at Rs14,842/ton.
 Adjusted EBITDA increased only 11% YoY to Rs303m. In the reported numbers, Rs142m pertaining to an iron ore
price hike in 1QFY11, was included in raw material (RM) expenses. We reduced this amount from RM expenses in
2QFY11 and added it to 1QFY11, which have been restated. EBITDA per ton was flat YoY at Rs2,808/ton (~US$65/
ton).