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Tata Steel (TATA) - Qtr. Update - Dated - August 13, 2014




Axis Capital Limited


14 Aug 2014





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Tata Steel’s (Bloomberg: TATA IN) Q1 consolidated EBITDA at Rs 43 bn (up 16% YoY) was above our estimate of Rs 38 bn due to better profitability at European operations. International operations’ EBITDA/ton improved to US$ 38 vs. US$ 28 in Q4FY14 led by lower costs. According to the company, it saved GBP 30 mn during the quarter led by rigorous efforts. But profitability is likely to moderate in Q2 due to recent softening in steel prices and, thus, we retain our full-year EBITDA/ton estimate at US$ 35. Odisha expansion on track: The company is aggressively pursuing its greenfield expansion (3 mnt plant in phase I) and expects the plant to commission by end of FY15. We are expecting the plant to produce 900 kt in FY16 and 2.2 mnt in FY17. Of a total capex of Rs 250 bn, the company has spent Rs 176 bn till date. Other highlights  Domestic operations: Volumes were at 2.1 mnt (up 5% YoY). Average steel realization was Rs 47,500/ton (vs. Rs 47,000 in Q4FY14 and Rs 44,800 in Q1FY14)  Extraordinary items: (a) Gain of Rs 12.7 bn relating to sale of its stake in Dhamra Port and (b) write-down of Rs 15.7 bn relating to goodwill and other assets (stake in Benga coking coal asset)  Iron ore import option open: The company has imported 500 kt of iron ore till date at its domestic operations. Though current mining operations are adequate to meet its requirements, the company indicated that iron ore mining situation is very dynamic; therefore, it is keeping its option to import iron ore open  Estimates and valuation: We retain our EPS estimates for FY15 at Rs 37, for FY16 at Rs 44 and for FY17 at Rs 65. Maintain BUY with target price of Rs 640 (5.5x FY17E EV/EBITDA and discounted back by 1-year by 15%). Our target price implies an upside of 20% from CMP of Rs 535. The stock trades at 6x FY16 EV/EBITDA and 4.6x FY17 EV/EBITDA Regards, Nitesh Jain (Sr VP – Materials) nitesh.jain@axiscap.in; 91 22 4325 1145 Jagdishwar Toppo (Executive Director – Materials) jagdishwar.toppo@axiscap.in; 91 22 4325 1103 Sujan Sanisetty (VP – Materials) sujan.sanisetty@axiscap.in; 91 22 4325 1122

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