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Tata Steel (TISC.BO) Rs602.15
Equity Research
Sale of mothballed TCP facility by end March, Reiterate Conv. Buy
News
On Feb 24, Tata Steel announced that the company has signed a
definitive sale agreement with Thailand steelmaker Sahaviriya Steel
Industries (SSI), for sale of Teesside Cast Products (TCP) (3.9 MT
mothballed steel facility) for US$469mn. This is following the MOU
signed in August, with the company expecting the transaction to be
completed by end March. The agreement covers the sale of coke ovens,
power generation facilities, sinter plant, blast furnace and steelmaking
facility including creation of a JV for the bulk terminal operations. To
contextualize, TCP which was mothballed in Feb 2010, contributed 73% of
FY10 EBITDA loss for Corus (US$220mn), after an international consortium
of buyers terminated their 10-year off take agreement.
Analysis
With the signing of the sale agreement, we expect the transaction would be
completed in the current fiscal year itself (before March 2011). We believe
the closing of the transaction would be a strategic positive for Tata Steel.
1) In our view, the TCP plant would not have been restarted in the medium
term, given its unviable economics and hence, its sale would not affect the
operating earnings of the company. We assume zero contribution from TCP
in our FY11E-FY13E estimates. 2) We think the funds (US$469mn) from the
sale would help further deleverage the balance sheet (post the equity offer).
As of 3QFY11, Tata Steel had net debt of US$11.8bn with FY11E net debt to
equity estimated at 1.3X. 3) Given that TCP is a fully depreciated asset with
zero carrying value on the book, any cash flows from the sale would directly
add to the book – US$469mn of funds implies Rs22/share of cash.
Implications
We maintain our Buy rating (on Conv. list) and target price. In our view, the
stock’s current price does not reflect Tata Steel’s strong growth trajectory
(46% FY10-13E EBITDA CAGR), driven by robust profitability at India
operations and sustainable recovery at Corus. Tata is trading at 4.9X FY11E
EV/EBITDA, 22% disc. to mid cycle of 6.2X , 26% disc. to peers.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel (TISC.BO) Rs602.15
Equity Research
Sale of mothballed TCP facility by end March, Reiterate Conv. Buy
News
On Feb 24, Tata Steel announced that the company has signed a
definitive sale agreement with Thailand steelmaker Sahaviriya Steel
Industries (SSI), for sale of Teesside Cast Products (TCP) (3.9 MT
mothballed steel facility) for US$469mn. This is following the MOU
signed in August, with the company expecting the transaction to be
completed by end March. The agreement covers the sale of coke ovens,
power generation facilities, sinter plant, blast furnace and steelmaking
facility including creation of a JV for the bulk terminal operations. To
contextualize, TCP which was mothballed in Feb 2010, contributed 73% of
FY10 EBITDA loss for Corus (US$220mn), after an international consortium
of buyers terminated their 10-year off take agreement.
Analysis
With the signing of the sale agreement, we expect the transaction would be
completed in the current fiscal year itself (before March 2011). We believe
the closing of the transaction would be a strategic positive for Tata Steel.
1) In our view, the TCP plant would not have been restarted in the medium
term, given its unviable economics and hence, its sale would not affect the
operating earnings of the company. We assume zero contribution from TCP
in our FY11E-FY13E estimates. 2) We think the funds (US$469mn) from the
sale would help further deleverage the balance sheet (post the equity offer).
As of 3QFY11, Tata Steel had net debt of US$11.8bn with FY11E net debt to
equity estimated at 1.3X. 3) Given that TCP is a fully depreciated asset with
zero carrying value on the book, any cash flows from the sale would directly
add to the book – US$469mn of funds implies Rs22/share of cash.
Implications
We maintain our Buy rating (on Conv. list) and target price. In our view, the
stock’s current price does not reflect Tata Steel’s strong growth trajectory
(46% FY10-13E EBITDA CAGR), driven by robust profitability at India
operations and sustainable recovery at Corus. Tata is trading at 4.9X FY11E
EV/EBITDA, 22% disc. to mid cycle of 6.2X , 26% disc. to peers.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Neutral
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