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MOSL: TATA STEEL (Sell) - PAT boosted by non-recurring items - India volumes cut - 3% growth in TSE volum




Motilal Oswal Securities Ltd.


18 Nov 2013





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Tata Steel (TATA IN, Mkt Cap USD5.5b, CMP INR359, Sell) Sanjay Jain (SanjayJain@MotilalOswal.com) / Pavas Pethia (Pavas.Pethia@MotilalOswal.com ) EBITDA in-line; non-recurring items boost PAT Cons. EBITDA was INR37b, flat QoQ and along expected lines. Standalone EBITDA grew 4% QoQ, driven by better performance of FAMD; steel volumes and margins were flat QoQ. Subsidiaries’ (TSE and others) EBITDA declined 10% QoQ to INR7.7b. Adj. PAT declined 18% QoQ to INR9.2b, higher than our estimate of INR3.5b due to non-recurring items – lower interest, and D&A and deferred tax credit at TSE. For TSE, EBITDA declined 29% QoQ to INR5.5b. EBITDA/ton declined 42% QoQ to USD26. Excluding NRV write-back, EBITDA/ton would have been USD13. Cutting FY15 volume estimate for TSI; estimate net debt at INR745b by FY15 Management cut its FY14 volume guidance for TSI to 8.3m tons (8.5m tons earlier) due to weak domestic demand, despite 0.7m tons of extra sales in 1HFY14. TSI has taken price hikes in Sept and Oct, but whether the prices stick needs to be watched. We are cutting FY15 volume estimate to 9m tons (9.5m tons earlier). Net debt increased by INR83b to INR685b in 1HFY14, largely due to forex translation loss. Project cost estimates continue to rise, as the site is designed for 6mtpa though phase-1 will be 3mtpa. The group’s annual capex is estimated at ~USD2.5b. This is likely to increase net debt to INR745b by FY15. Raising earnings estimates, target price; maintain Sell For FY14, our cons. EBITDA estimate remains unchanged at IN164b, but lower tax and depreciation at subsidiaries results in 26% EPS upgrade to INR41.6. For FY15, we have raised our consolidated EBITDA estimate by INR4b to INR169b and EPS estimate by 29% to INR42.3, to factor in higher volumes and margins for TSE. Steel sector has got re-rated due to stabilization of steel markets. We are increasing the target multiple from 5x to 5.5x for Indian operations. Our revised TP is INR312 (INR210 earlier), the combined effect of re-rating and earnings upgrade. Balance sheet will remain stretched, given heavy investments in Indian greenfield projects and delays. Indian steel demand is yet to bottom out. We are not sure if the benefit of operating leverage will result in margin expansion for TSE. Sell.

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