Tata Steel - Optimistic for a better H1FY13; visit note; Buy ::Edelweiss, PDF link

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Tata Steel (TATA IN, INR 450, Buy)

Key takeaways from our recent meeting with the Tata Steel management are: a) India operations’ Q4 EBITDA/t to remain flat QoQ at USD320, led by cost one-offs; in FY13, declining raw material costs, firm realisation and import duty hike could increase EBITDA/t to USD370, b) incremental 1mt volume in FY13 from 2.9mtpa Jamshedpur expansion, and c) Europe volumes estimated at ~14mt in FY13 with EBITDA/t of USD45. With upside risk to our estimates we retain ‘BUY’ with TP of INR502/share.

India Q4 EBITDA/t to be flat QoQ; FY13: USD 370/t

India Q4 sales volume is likely to be ~1.75mt. EBITDA/t could remain flat QoQ as forex impact of INR ~1bn on coking coal and higher wage provision of INR 1.25-1.5 bn offset ~INR 1,500/t higher realisation. In FY13, however, with decline in coking coal cost, firm domestic realisation and recent import duty hike of 2.5%, the company expects EBITDA/t to improve to USD 370 (our assumption: USD328/t). The 2.9mtpa Jamshedpur expansion is expected to deliver 1mt (our assumption: 1.25mt) in FY13 with back ended ramp up.

Europe Q4 EBITDA/t to rise marginally; FY13: USD45/t

Q4 sales volume is estimated to be ~3.6-3.7mt (Q3FY12: 3.4mt) with only marginal positive EBITDA/t (USD0-10). In FY13, the company expects EBITDA/t of ~USD45 (our assumption: USD32) led by expectation of steel prices outperforming raw material cost. FY13 volume targeted at 14mt (our assumption: 13.5 mt) led by H2FY13 benefit of blast furnace rebuild in Port Talbot.

Outlook and valuations: Positive; maintain ‘BUY’

Timely commissioning of high margin 2.9 mtpa expansion plant remains a key trigger. For India, margin upside of up to USD50/t poses an upside risk to our FY13/FY14 estimates but at this stage we keep it unchanged.  Retain‘BUY/Sector Outperformer’ recommendation/rating on the stock with target price of INR 502/share. 

Tata Steel - Optimistic for a better H1FY13; visit note; Buy

Regards,