Tata Steel - Corus surprises positively. - Kotak Sec

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Tata Steel (TATA)
Metals
Corus surprises positively. Tata Steel reported 2QFY11 consolidated EBITDA of Rs36.8
bn, 1.9% ahead of our estimate. Net income of Rs19.8 bn was 8.4% ahead of our
estimate led by solid performance of Corus and lower-than-expected tax rate. EBITDA
of US$56/ton for Corus was ahead of our estimate of US$45/ton, while profitability of
the India business fell short of expectations. Tata Steel’s brownfield expansion and
investments in raw material projects can deliver significant value in the medium term.





Consolidated performance ahead of our estimate
Tata Steel reported consolidated EBITDA of Rs36.8 bn, 1.9% ahead of our estimate. The
outperformance was led by solid performance of Corus, which reported EBITDA of US$197 mn,
18% ahead of our estimate. The performance of the India operations was 9% lower than our
estimate. Tata Steel reported consolidated net income of Rs19.8 bn (+8.4% qoq, +173.1% yoy),
8.4% ahead of our estimate and helped by higher-than-expected other income and lower-thanexpected
tax rates.

Corus realizations improve sequentially but will be under pressure in 3QFY11E
Corus reported 5% improvement in realization to US$1,108/ ton. This helped Corus report
EBITDA/ton of US$55 despite 20% qoq increase in raw material cost/ton. Corus attributes this to a
mix of factors including benefits of annual and quarterly steel contracts and good momentum on
spot pricing that continued till July- August. On expected lines, profitability will come under
pressure in 3Q on account of lag impact of raw material price increase and likely decline in
realization. Profitability may improve again in 4QFY11E on lag benefit of raw material price decline.

Proposals to raise Rs70 bn through various equity/debt instruments
The Tata Steel board has passed a resolution to seek shareholder approval to raise additional longterm
resources of up to Rs70 bn through equity issuance, GDRs, debentures, DVRs, FCCBs etc.
Tata Steel indicated that the capital raised would be used for capex for brownfield expansion, raw
material projects and upgrade of capex for the European markets. The company highlighted that it
has adequate liquidity and that funds are not being raised for any scheduled repayment of debt
but for long-term strategic investments/projects that can deliver significant value.

Stock trades at 5.5X FY2011E and 5.2X FY2012E EBITDA
Tata Steel trades at 5.5X FY2011E and 5.2X FY2012E EBITDA (adjusting for CWIP). This is at a
discount to peers. In our view, FY2013E could be an important year for Tata Steel since (1) benefits
from 2.9 mtpa capacity at expansion at Jamshedpur will fully reflect in financials and
(2) investments in raw material security projects may start delivering results.