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MOSL: TATA STEEL (Buy) - In-line - TSI led strong operating performance - capex breaches guidance




Motilal Oswal Securities Ltd.


15 May 2014





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TATA STEEL 4QFY14: In-line; TSI led strong operating performance; capex breaches guidance; Maintain Buy (TATA IN, Mkt Cap USD7.3b, CMP INR452, Target Price INR496, 10% Upside, Buy) Consolidated EBITDA increased 25% QoQ to INR50.1b helped by strong operating performance of TSI. TSE EBITDA declined 5% QoQ due to shrinkage in spreads. Average EBITDA per ton improved 5% QoQ to USD107. The reported Net debt (inclusive of INR22.75b perpetual bonds) has reduced by INR28b QoQ due to forex gain of INR19b and inventories reduction at TSE. TSI’s EBITDA increased 40% QoQ to INR41b driven by 17% volume growth, 4% growth in realization, and lower fixed & power fuel costs. Volume guidance for FY15 has been revised up from 8.8mt to 9.1-9.2mt. TSE’s EBITDA decreased 5% QoQ to INR8.2b due to margin squeeze. Margins were hit by shrinkage in spread by Euro15 QoQ to Euro 175. EBITDA per ton declined 25% QoQ to USD33. 1QFY15 spreads are up Euro 15/t. FY14 capex, at INR165b, was INR20b above our estimates. FY16 capex guidance too is significantly higher at INR165b vs. our est. of INR120b apparently factoring some of capex in less discussed projects. We have upgraded TSI EBITDA per ton by USD4 and volumes by 230kt for both FY15 and FY16. Increase in net debt, due to higher than estimated capex, is having negative impact on equity value. Overall SOTP is cut by INR36 to INR496/share based on FY15 estimate. We believe that the accelerating global (ex-China) demand (key market for Tata Steel) is likely to drive volumes and margins for Tata Steel. KPO is rightly positioned to leverage upturn in Indian steel demand. Maintain Buy.

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