Tata Steel Getting fit for future; Accumulate:: Emkay

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Tata Steel

Getting fit for future; Accumulate

ACCUMULATE

CMP: Rs 606                                       Target Price: Rs 712

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n     Higher volume in Indian operations and slightly higher realization in European operation helped revenue growth of 5% to Rs 286.5 bn, in line with our expectations

n     Higher raw material costs (up ~20% QoQ) weighed on the EBITDA margin, which fell 348 bps QoQ to 12.8%. EBITDA/ tonne for Tata Steel Europe remained at ~US$60

n     Higher other income due to stake sales in Tata Motors and Tata Power helped consolidated PAT to grow 8.4% on QoQ to Rs 19.8 bn

n     Revising up our earnings estimates for FY11E and FY12E to Rs 81.4 and Rs 97.8 respectively. We assign Accumulate on the stock

Better domestic sales volume led to topline growth

Tata Steel, on a consolidated basis reported revenue growth of ~13% and ~5% on YoY

and QoQ basis respectively mainly on the back of higher sales volume in the Indian

markets. This was due to continuous robust demand and fall in imports during the

quarter. Better price realization in the European operations also helped in top line

growth at least to some extent

Rise in raw material costs dented operating margins

Both iron ore and coking coal contract prices rose during the quarter helping raw

material costs as a percentage to sales to go up by 520 bps on QoQ. This contracted

the EBITDA margins by 348 bps on QoQ to 12.8% for Q2FY11. On YoY basis it has

been a robust performance, as the industry as a whole remained under severe pressure

during the corresponding quarter previous year. EBITDA/ tonne for the consolidated

business stood at Rs 6309.8, down by 16% QoQ. For Tata Steel Europe the EBITDA/

tonne remained at US$60, down from US$79 during Q1FY11

Profit of Rs 627 crore from sale of investments boosted bottomline

Though, there has been a drop in operating margins, the net profit for the quarter grew

by 8.4% QoQ to Rs 19.8 bn against the loss of Rs 27.2 bn in Q2FY10. This was

primarily due to the profit from the sale of investments to the tune of Rs 627 crore that

accrue during Q2FY11. Removing that part the bottom line performance remained pretty

much in line with our estimates of Rs 13.8 bn

Outlook and Valuations

The company has been consciously focusing on improving its balance sheet by way of

restructuring debt, divestments, increasing stakes in mining resources. Some benefits of

that have already started flowing in and we believe going forward this would be more

prominent. At the CMP of RS 606, the stock is trading at 6x its FY12E EPS and 4.1x

FY12E EV/ EBITDA. We value the standalone business at 5x its FY12E EV/ EBITDA

and oversea subsidiaries 4x FY12E EV/ EBITDA to arrive at a target price of Rs 712/

share. We assign ACCUMULATE rating on the stock.