Tata Steel – 2QFY2011 Result Update Angel Broking

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  Tata Steel – 2QFY2011 Result Update

Angel Broking maintains a Buy on Tata Steel with a Target Price of Rs702.

For 2QFY2011, Tata Steel’s 2QFY2011 consolidated net revenue came in at

`28,646cr and net profit at `1,979cr. Going forward, while 3QFY2011E

performance of Tata Steel Europe (TSE) is likely to be affected by seasonal trends,

4QFY2011 is expected to be relatively stronger. On the other hand, the Indian

operations are expected to remain strong because of higher steel prices and raw

material integration levels. We maintain a Buy on the stock.

Indian operations aided by higher volumes: Standalone net revenues grew 25.0%

yoy and 8.8% qoq to `7,038cr on account of higher sales volume, improving

product mix and higher realisations. Sales volumes grew 14.0% yoy and 18.7%

qoq to 1.7mn tonnes. Average blended realisation increased by 9.7% yoy (down

8.5% qoq) to `42,398/tonne. EBITDA margin expanded 334bp yoy to 36.4% as

EBITDA/tonne for the quarter stood higher at US $332 (US $264 in 2QFY2010).

Other income was boosted by gain on sale of investments and interest expenses

declined 12.6% yoy to `342cr. Thus, net profit surged 128.7% yoy to `2,065cr.

Seasonally weak quarter for TSE: Capacity utilisation in Europe stood at 87% as

compared to 90% in 1QFY2011. In Europe, deliveries were down 9.5% yoy and

4.9% qoq to 3.5mn tonnes, as the quarter is seasonally weak. Group deliveries

were down 5.9% yoy to 6mn tonnes and flat qoq. EBITDA/tonne for TSE declined

to US $56 as compared to US $79 in 1QFY2011, as raw material cost/tonne

increased 20% qoq. Thus, consolidated EBITDA/tonne was down at US $132 as

compared to US $161 in 1QFY2011.

Analyst meet - Key takeaways

􀂄 The sales volume of the ferro chrome segment stood at 366kt as compared to

302kt in 1QFY2011 and 347kt in 2QFY2010. However, average ferro

realisation declined on a sequential basis from US $1,486/tonne in

1QFY2011 to US $1,331/tonne in 2QFY2011, but increased yoy as

compared to US $1,128/tonne in 2QFY2010.

􀂄 Other income, on standalone basis, included gain on sale of investments in

Tata Motors and Tata Power, and on consolidated basis other income also

included stake sale of Malaysia’s Southern Steel. Thus, one-time gain of

`627cr is included in consolidated other income. As a result, adjusted net

profit came in at `1,562cr.

􀂄 During the quarter, the company successfully completed refinancing of the

£3.5bn term loan and revolving credit facilities. The refinancing has been

done at Libor+350bp as against the earlier arrangement of Libor+220bp.

This will result in additional interest expense of £40mn.

􀂄 During the quarter, the company’s board approved raising additional capital

of `7,000cr (US $1.5bn). The funds will be utlilised for the Jamshedpur

expansion project, downstream and mining projects, rebuilding of the blast

furnace at Port Talbot and pre-payment of debt.

􀂄 Net debt at the end of 2QFY2011 stood at US $10.7bn. Management

indicated that its target net debt/equity is 1:1 compared to 1.5:1 at the end of

the quarter.

Result Highlights

Indian operations aided by higher volumes

Tata Steel’s standalone net revenue grew 25.0% yoy and 8.8% qoq to `7,038cr on

account of higher sales volume, improving product mix and higher realisations.

While sales volumes grew 14.0% yoy and 18.7% qoq to 1.7mn tonnes, average

blended realisation increased by 9.7% yoy (down 8.5% qoq) to `42,398/tonne.

EBITDA margin expanded 334bp yoy to 36.4% as EBITDA/tonne for the quarter

stood higher at US $332 (US $264 in 2QFY2010). Other income was boosted by

gain on sale of investments and interest expenses declined 12.6% yoy to `342cr.

Consequently, net profit surged 128.7% yoy to `2,065cr.

Seasonally weak quarter for TSE

Capacity utilisation in Europe stood at 87% as compared to 90% in 1QFY2011. In

Europe, deliveries were down 9.5% yoy and 4.9% qoq to 3.5mn tonnes, as the

quarter is seasonally weak. Group deliveries were down 5.9% yoy to 6mn tonnes

and flat qoq. EBITDA/tonne for TSE declined to US $56 as compared to US $79 in

1QFY2011, as raw material cost/tonne increased 20% qoq. Thus, consolidated

EBITDA/tonne was down at US $132 as compared to US $161 in 1QFY2011.

Investment Arguments

Brownfield expansion on track

Tata Steel’s 3mn tonne brownfield expansion programme is on track and expected

to be commissioned by 2HFY2012. Till September 2010, the company had

incurred capex of `5,732cr and plans to incur `2,963cr in 2HFY2011. The product

mix constitutes 2.5mn tonne of HRC and 0.3mn tonne of slabs. We believe

profitability would be further supported by higher volumes from FY2013 onwards.

Higher integration levels for TSE to boost earnings

Tata Steel is in the process of developing a coking coal mine in Mozambique and

an iron ore mine in Canada to enhance integration levels of TSE. The projects are

expected to be commissioned by 1QFY2012. The total capex remaining for the

Mozambique project is US $100–150mn, while the Canadian project will involve

capex of CAD350mn. We expect these backward integration projects at

Mozambique and Canada to boost TSE’s earnings substantially.

Outlook and Valuation

At the CMP, the stock is trading at 6.3x FY2011E and 5.6x FY2012E EV/EBITDA.

Going forward, while 3QFY2011E performance of TSE is likely to be impacted by

the seasonal trends, 4QFY2011 is expected to be relatively stronger. On the other

hand, the company’s Indian operations are expected to remain strong because of

higher steel prices and raw material integration levels. We maintain a Buy on the

stock, with an SOTP Target Price of `702.