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Tata Steel Ltd (TATA IN)
OW: Overcoming the chaos
Reverse valuations suggests that markets imply a negative
value for Tata Steel Europe (TSE) assets
We take note of deterioration in global macroeconomic
conditions; but do not see immediate risk to our estimates
Pension fears, liquidity issues not yet concerning; retain OW
with TP of INR710
Markets valuing TSE assets at a negative number—worst-case should be ‘zero’
Current valuations of TATA imply that markets are valuing TSE at a negative value of
cUSD1bn (excluding debt) and building in cUSD0.5bn of losses at the EBITDA stage for the
next 12-months (see Exhibit 6). We find this irrational, given that the assets should in a worstcase
scenario have ‘zero’ value – unless companies have no option but to run assets in losses
forever (not the case with TSE, in our opinion). Our analysis leads to following:
The market’s willingness to ascribe scrap value to TSE implies c32% upside (Ex 5)
Comparison to 2008-09 lows misses the restructuring that happened in the last three
years (work force down 16%, Loss making Teeside Cast Product (TCP) facility sold,
new measures initiated)
If EBITDA/t fell in India to USD325/t and TSE to USD20/t (1QFY12 at USD440
and USD78 respectively), our FY2013e EBITDA has risks of c13% (Ex: 3)
Since 2003, TATA has traded only below forward book 12 times (Global Financial
Crisis (GFC) period avg trading at 1.05x 12m fwd P/B) and now trades at 1.1x
1QFY12 book ( and 0.9x 12m fwd book; see Exhibit 1a)
Macroeconomic environment deteriorated, but situation for TATA better than GFC
We take onboard the heightened risk that macroeconomic climate may deteriorate further;
however, we note that our EBITDA estimates for FY12e are 26% lower y-y for TSE and only
c6% higher for the India business.
In addition, we note that TSE made its worst-EBITDA loss of USD117/t in 1QFY10, but still
ended the year with an EBITDA loss of just USD17/t. Since then however, TATA’s fixed
costs are significantly lower (work force lower by 16%, TCP business sold and other measures
initiated), which should imply that annual losses (if at all) for TSE should be much more
contained than those witnessed during the last GFC.
Retain OW rating and TP of INR710
We find that fears of pension provisions and liquidity drying out are not concerning at this
juncture . We retain our O rating and TP of INR710.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Steel Ltd (TATA IN)
OW: Overcoming the chaos
Reverse valuations suggests that markets imply a negative
value for Tata Steel Europe (TSE) assets
We take note of deterioration in global macroeconomic
conditions; but do not see immediate risk to our estimates
Pension fears, liquidity issues not yet concerning; retain OW
with TP of INR710
Markets valuing TSE assets at a negative number—worst-case should be ‘zero’
Current valuations of TATA imply that markets are valuing TSE at a negative value of
cUSD1bn (excluding debt) and building in cUSD0.5bn of losses at the EBITDA stage for the
next 12-months (see Exhibit 6). We find this irrational, given that the assets should in a worstcase
scenario have ‘zero’ value – unless companies have no option but to run assets in losses
forever (not the case with TSE, in our opinion). Our analysis leads to following:
The market’s willingness to ascribe scrap value to TSE implies c32% upside (Ex 5)
Comparison to 2008-09 lows misses the restructuring that happened in the last three
years (work force down 16%, Loss making Teeside Cast Product (TCP) facility sold,
new measures initiated)
If EBITDA/t fell in India to USD325/t and TSE to USD20/t (1QFY12 at USD440
and USD78 respectively), our FY2013e EBITDA has risks of c13% (Ex: 3)
Since 2003, TATA has traded only below forward book 12 times (Global Financial
Crisis (GFC) period avg trading at 1.05x 12m fwd P/B) and now trades at 1.1x
1QFY12 book ( and 0.9x 12m fwd book; see Exhibit 1a)
Macroeconomic environment deteriorated, but situation for TATA better than GFC
We take onboard the heightened risk that macroeconomic climate may deteriorate further;
however, we note that our EBITDA estimates for FY12e are 26% lower y-y for TSE and only
c6% higher for the India business.
In addition, we note that TSE made its worst-EBITDA loss of USD117/t in 1QFY10, but still
ended the year with an EBITDA loss of just USD17/t. Since then however, TATA’s fixed
costs are significantly lower (work force lower by 16%, TCP business sold and other measures
initiated), which should imply that annual losses (if at all) for TSE should be much more
contained than those witnessed during the last GFC.
Retain OW rating and TP of INR710
We find that fears of pension provisions and liquidity drying out are not concerning at this
juncture . We retain our O rating and TP of INR710.
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