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Tata Steel — Margins have peaked; headwinds
ahead
Price Objective Change
1Q EBITDA in line, margin pressure ahead; Underperform
Adj. Consol. PAT grew 8%QoQ to Rs14.7bn below our Rs17.7bn est. EBITDA
was in line at Rs44.3bn (+14%QoQ), as higher India EBITDA was offset by lower
TSE EBIDTA. However, higher tax (43%) led to lower profits. Reported PAT was
higher at Rs53.5bn due to gains on sale of investments (Rs38.8bn). We have cut
our FY12-13E EPS by 6-7% & PO to Rs470 as we factor in lower vols. & higher
costs. We think margins have peaked & expect margin squeeze at TSE over next
few qtrs, due to lower ASP & higher input costs. Valuations appear reasonable,
but multiples could compress further given uncertain outlook & earnings risk.
TSE adj. EBITDA was US$274mn (+26%QoQ), 13% below est.
Vols. declined 15%QoQ to 3.5mt, 6% below our est. Adj. EBITDA/t was US$78/t
(+$26/t QoQ) vs. our US$83/t est. ASP was up 10%QoQ (3% ahead) due to full
impact of steel price hikes in 1HCY11. However, only partial impact of higher
input costs came thru in 1Q. European macro concerns have increased. Spot
HRC prices in Europe are down 9% vs. June Q. Also higher coking coal costs
should come thru with a lag 2Q onwards leading to a potential margin squeeze.
India EBITDA grew 1%QoQ to Rs31bn, 10% ahead of est.
Standalone PAT was Rs17.6bn. Steel EBITDA/t was US$410/t (+13%QoQ). ASP
was up 3%QoQ, (4% ahead) inline with increase reported by other Indian peers.
Raw material costs/t surprisingly declined 14%QoQ as Tata may have gained
from higher low cost carry forward inventory. Vols. declined 7%QoQ.
Key takeaways from analyst call
Mgmt expects slower demand in Europe due to higher uncertainty. In India,
demand is stable, but prices are likely to show downward bias. 3mtpa expansion
is expected to be commissioned in 4QFY12, but it said it will add to vols. only in
FY13. India vol. guidance is 6.6mt in FY12 & 9.2mt in FY13. 1Q net debt was
US$9.1bn
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel — Margins have peaked; headwinds
ahead
Price Objective Change
1Q EBITDA in line, margin pressure ahead; Underperform
Adj. Consol. PAT grew 8%QoQ to Rs14.7bn below our Rs17.7bn est. EBITDA
was in line at Rs44.3bn (+14%QoQ), as higher India EBITDA was offset by lower
TSE EBIDTA. However, higher tax (43%) led to lower profits. Reported PAT was
higher at Rs53.5bn due to gains on sale of investments (Rs38.8bn). We have cut
our FY12-13E EPS by 6-7% & PO to Rs470 as we factor in lower vols. & higher
costs. We think margins have peaked & expect margin squeeze at TSE over next
few qtrs, due to lower ASP & higher input costs. Valuations appear reasonable,
but multiples could compress further given uncertain outlook & earnings risk.
TSE adj. EBITDA was US$274mn (+26%QoQ), 13% below est.
Vols. declined 15%QoQ to 3.5mt, 6% below our est. Adj. EBITDA/t was US$78/t
(+$26/t QoQ) vs. our US$83/t est. ASP was up 10%QoQ (3% ahead) due to full
impact of steel price hikes in 1HCY11. However, only partial impact of higher
input costs came thru in 1Q. European macro concerns have increased. Spot
HRC prices in Europe are down 9% vs. June Q. Also higher coking coal costs
should come thru with a lag 2Q onwards leading to a potential margin squeeze.
India EBITDA grew 1%QoQ to Rs31bn, 10% ahead of est.
Standalone PAT was Rs17.6bn. Steel EBITDA/t was US$410/t (+13%QoQ). ASP
was up 3%QoQ, (4% ahead) inline with increase reported by other Indian peers.
Raw material costs/t surprisingly declined 14%QoQ as Tata may have gained
from higher low cost carry forward inventory. Vols. declined 7%QoQ.
Key takeaways from analyst call
Mgmt expects slower demand in Europe due to higher uncertainty. In India,
demand is stable, but prices are likely to show downward bias. 3mtpa expansion
is expected to be commissioned in 4QFY12, but it said it will add to vols. only in
FY13. India vol. guidance is 6.6mt in FY12 & 9.2mt in FY13. 1Q net debt was
US$9.1bn
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