Analyst Research Report Snapshot

Title:

Tata Steel (TATA) - Visit Note - Dtd. - August 23, 2012

Price:

$23.00

Provider:

Axis Capital Limited

Date:

23 Aug 2012

Pages:

3

Type:

AcrobatPDF

Companies referenced:

TISC.NS

Available for Immediate Download
Summary:

We met the management of Tata Steel. Margins of both Indian and European operations are expected to be lower in Q2 vs. Q1. However, the company expects recovery in H2FY13 as volume growth in India kicks-in and steel/RM prices stabilize. Key takeaways: Indian operations  Volumes: Recently commissioned 3 mnt blast furnace is operating at optimal capacity and the company maintained its guidance of 1 mnt incremental volume in FY13. We maintain our FY13 and FY14 volume estimates of 7.9 mnt and 8.9 mnt respectively.  Costs: External coke purchases would continue for next 2 quarters, which would increase overall costs. Coke purchases will decline in Q4 after commissioning of coke oven plant in Jan ’13. Tata Steel had a negative impact of Rs 2.5 bn in Q1 due to external coke sourcing.  Pricing and profitability: Indian steel prices have remained firm due to a weak INR and lower production from secondary producers. However, management expects average realization to moderate in Q2 due to weakening demand and sharp fall in global steel prices. Overall profitability will be lower than that of Q1. European operations  Volumes: FY13 volume is expected to remain flat at 14 mnt. Steel demand (particularly for long products) remains weak.  Costs: Iron ore and coking coal prices have corrected sharply in last 3 months. However, this will benefit Q3 onwards as the company has high cost inventory. Blast furnace re-build at Port Talbot facility will result in operational efficiencies.  Pricing and profitability: Steel prices have fallen sharper than RM prices. Therefore, Q2 profitability will be subdued. Margin would likely recover Q3 onwards as benefit of lower RM prices start kicking-in. Group capex  Total group capex is expected to be USD 2-2.3 bn in FY13. Capex for European operations is expected to be USD 500-600 mn. Rest will largely be for 3 mtpa greenfield project in Odisha and overseas raw material projects. Maintain BUY with target price of Rs 476 – upside of 21% (CMP of Rs 393) We remain bullish on Tata Steel as volume growth in India will drive earnings in next 2 years. Indian operations will also benefit from continuing iron ore shortage situation in India. Despite weak steel demand in Europe, falling raw material prices would help European operations’ EBITDA to remain positive on yearly basis. We maintain our EPS for FY13E and FY14E at Rs 46 and Rs 52 respectively. Maintain BUY with target price of Rs 476 (domestic operations at 5x FY14E EV/EBITDA and international operations at 4.5x FY14E EV/EBITDA). At CMP, the stock trades at 5.2x FY13E EV/EBITDA and 4.4x FY14E EV/EBITDA. Regards, Nitesh Jain (Sr VP – Materials) Institutional Equity Research ENAM Securities Pvt. Ltd. Tel: +91 22 4325 1145 Jagdishwar Toppo (Executive Director – Materials) Institutional Equity Research ENAM Securities Pvt. Ltd. Tel: +91 22 4325 1103 Sujan Sanisetty (Asst VP – Materials) Institutional Equity Research ENAM Securities Pvt. Ltd. Tel: +91 22 4325 1122

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