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RESULT UPDATE
Tata Steel — Capital Raising On The Cards
Tata Steel — Capital Raising On The Cards
Our view of the 2QFY11 results
Consolidated net sales came in at Rs280.9bn, 8% higher than our estimate of Rs259.1bn while EBITDA at Rs36.7bn was 3% ahead of our estimate of Rs35.6bn. Net profit at Rs19.7bn was significantly ahead of our expectation of Rs13.6bn on account of sale of various investments. Corus reported EBITDA of US$56/t while EBITDA/t (incl. other operating income) in India fell to Rs15,837/t in 2QFY11 from Rs20,891/t in 1QFY11, led by drop in realisations and higher coking coal costs.
Where do we go from here?
3QFY11 should see a further dip in Corus’ EBITDA per tonne led by: (i) lower steel realisations (prices in Europe started falling August onward); and (ii) the further increasing input costs (lag impact of raw materials = costs). In our opinion, this is likely to be the trough profitability for the European operations and will be compensated by the higher margins in India in 3Q (led by firmer steel prices). We expect Corus to have 15.9mt of sales in FY12E with an average EBITDA of US$65/t.
Capital issue on the cards
The strategy of reducing balance sheet gearing continued – other income in the quarter was Rs8.1bn, led by sale of various investments (stake in group companies etc.). We expect such stake sales to continue in the future, freeing cash for the 3.0mtpa expansion in India and deleveraging the balance sheet. The board of directors has also approved the raising of LT funds of an amount of US$1.5bn through equity shares/GDRs etc. An equity issue up to US$1.0bn has already been talked about in the market in the last few months, and in recent past, the markets have considered the reduced gearing via the capital issue route in a favourable manner.
Valuation and Recommendation
At CMP, the stock is trading at 6.2x FY12E EV/EBITDA. This compares with 6.5x for Indian peers and 6.0x for the steel companies in the Western developed markets (US and Europe). We maintain our BUY recommendation on the stock, based on the improving operating performance in Europe as well as the profitable capacity expansion in India, which is expected to start contributing in 4QFY12. We roll forward our TP to Rs720 for September 2011 (earlier Rs650 for March 2011).
Consolidated net sales came in at Rs280.9bn, 8% higher than our estimate of Rs259.1bn while EBITDA at Rs36.7bn was 3% ahead of our estimate of Rs35.6bn. Net profit at Rs19.7bn was significantly ahead of our expectation of Rs13.6bn on account of sale of various investments. Corus reported EBITDA of US$56/t while EBITDA/t (incl. other operating income) in India fell to Rs15,837/t in 2QFY11 from Rs20,891/t in 1QFY11, led by drop in realisations and higher coking coal costs.
Where do we go from here?
3QFY11 should see a further dip in Corus’ EBITDA per tonne led by: (i) lower steel realisations (prices in Europe started falling August onward); and (ii) the further increasing input costs (lag impact of raw materials = costs). In our opinion, this is likely to be the trough profitability for the European operations and will be compensated by the higher margins in India in 3Q (led by firmer steel prices). We expect Corus to have 15.9mt of sales in FY12E with an average EBITDA of US$65/t.
The strategy of reducing balance sheet gearing continued – other income in the quarter was Rs8.1bn, led by sale of various investments (stake in group companies etc.). We expect such stake sales to continue in the future, freeing cash for the 3.0mtpa expansion in India and deleveraging the balance sheet. The board of directors has also approved the raising of LT funds of an amount of US$1.5bn through equity shares/GDRs etc. An equity issue up to US$1.0bn has already been talked about in the market in the last few months, and in recent past, the markets have considered the reduced gearing via the capital issue route in a favourable manner.
Valuation and Recommendation
At CMP, the stock is trading at 6.2x FY12E EV/EBITDA. This compares with 6.5x for Indian peers and 6.0x for the steel companies in the Western developed markets (US and Europe). We maintain our BUY recommendation on the stock, based on the improving operating performance in Europe as well as the profitable capacity expansion in India, which is expected to start contributing in 4QFY12. We roll forward our TP to Rs720 for September 2011 (earlier Rs650 for March 2011).
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