Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe the key investor concern on TATA is the 'What If' on Europe and
implications for TATA earnings. As per our analysis, TATA is currently trading at
7x FY13E JPM worst-case EV/EBITDA, in line with GFC lows.
How bad can India be? Average India EBITDA/MT over FY05-11 was
$350/MT (average iron ore/coking coal at $107/150, trough EBITDA in GFC
stood at $181/MT in Q4FY09). Our current forecasts for FY13 stand at
$314/MT, ~$100/MT lower than Q1FY12 actual as we build in lower steel
prices led by iron ore price declines and domestic oversupply. EBITDA/MT in
a mid-cycle scenario can go down to$280/MT and in a worst-case scenario go
down to $250/MT (this would imply BULKS price correction of ~30% from
current levels, while mid-cycle implies 22%).
How bad can Europe be? During GFC, Corus reported three consecutive
quarters of EBITDA losses (Q4FY09-Q2FY10, $1bn), which was driven in our
view by a combination of sharp reduction in volumes, ASPs (bulks came down
with a lag), loss from cancellation of the off-take arrangement at TCP and restructuring
costs. We estimate a mid-cycle EBITDA/MT at $40/MT and worst
case of $20/MT vs. $67/MT current forecasts with volumes at 14/12MT vs.
15.7MT current estimates.
What has changed in Corus since GFC? Since the GFC, TATA has reduced
its workforce by 27% and capacity by 23%. We believe the increased focus on
Valued Added Steels does provide some additional support to margins. These
changes in our view should mean that Corus would likely remain EBITDA
positive. Additionally, as JPM European Steel Analyst Alessandro Abate
highlights (European Steel 360 #5 : Sector valuation vs. risk of recession: MT
and VOE placed best), 'the market is trying to price in the risk of 2009 recession
to 2012E steelmakers’ earnings, which would imply, to fully materialize, both:
1) a decline of 2012E IP from 2011E’s level, and 2) 2009-like destocking not
supported by the low level of steel inventory throughout the producer-end user
value chain. As such, the likelihood of a reduction of 2012E steel sector
earnings from 2011E by a magnitude similar to the 2009/2008 earnings decline
is highly unlikely, in our view’.
What does this mean for the balance sheet? Lower volumes at Corus should
lead to working capital release and net debt should come down to $8.8/8.5bn
from $9.1bn levels. TATA remains our top pick in India MM universe. Key
risks include project delays and iron ore price declines.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe the key investor concern on TATA is the 'What If' on Europe and
implications for TATA earnings. As per our analysis, TATA is currently trading at
7x FY13E JPM worst-case EV/EBITDA, in line with GFC lows.
How bad can India be? Average India EBITDA/MT over FY05-11 was
$350/MT (average iron ore/coking coal at $107/150, trough EBITDA in GFC
stood at $181/MT in Q4FY09). Our current forecasts for FY13 stand at
$314/MT, ~$100/MT lower than Q1FY12 actual as we build in lower steel
prices led by iron ore price declines and domestic oversupply. EBITDA/MT in
a mid-cycle scenario can go down to$280/MT and in a worst-case scenario go
down to $250/MT (this would imply BULKS price correction of ~30% from
current levels, while mid-cycle implies 22%).
How bad can Europe be? During GFC, Corus reported three consecutive
quarters of EBITDA losses (Q4FY09-Q2FY10, $1bn), which was driven in our
view by a combination of sharp reduction in volumes, ASPs (bulks came down
with a lag), loss from cancellation of the off-take arrangement at TCP and restructuring
costs. We estimate a mid-cycle EBITDA/MT at $40/MT and worst
case of $20/MT vs. $67/MT current forecasts with volumes at 14/12MT vs.
15.7MT current estimates.
What has changed in Corus since GFC? Since the GFC, TATA has reduced
its workforce by 27% and capacity by 23%. We believe the increased focus on
Valued Added Steels does provide some additional support to margins. These
changes in our view should mean that Corus would likely remain EBITDA
positive. Additionally, as JPM European Steel Analyst Alessandro Abate
highlights (European Steel 360 #5 : Sector valuation vs. risk of recession: MT
and VOE placed best), 'the market is trying to price in the risk of 2009 recession
to 2012E steelmakers’ earnings, which would imply, to fully materialize, both:
1) a decline of 2012E IP from 2011E’s level, and 2) 2009-like destocking not
supported by the low level of steel inventory throughout the producer-end user
value chain. As such, the likelihood of a reduction of 2012E steel sector
earnings from 2011E by a magnitude similar to the 2009/2008 earnings decline
is highly unlikely, in our view’.
What does this mean for the balance sheet? Lower volumes at Corus should
lead to working capital release and net debt should come down to $8.8/8.5bn
from $9.1bn levels. TATA remains our top pick in India MM universe. Key
risks include project delays and iron ore price declines.
No comments:
Post a Comment