Tata Steel (TATA IN; Mkt Cap USD11.9b, CMP Rs606, Neutral)

 

-     Tata Steel's 2QFY11 consolidated adjusted PAT declined 30% QoQ to Rs13.1b, which was above our estimate of Rs7.6b, largely due to better than expected performance of Tata Steel Europe (TSE). TSE's average realization rose 5% QoQ to US$1,108/ton contrary to the general trend of declining prices.

-     Tata Steel India's (TSI) adjusted PAT declined 14% QoQ to Rs13.7b (against our estimate of Rs12.2b) despite a 19% QoQ jump in steel volumes. The realization decline was slightly higher than our expectation. The realization of long products declined 12% QoQ to Rs27,500/ton and that of flat products declined 5% QoQ to Rs35,589/ton. The blended realization declined 9% QoQ to Rs39,139/ton.

-     TSI's EBITDA declined 10% QoQ to Rs26.3b (up 37% YoY). EBITDA per ton fell 24% QoQ to Rs14,758/ton (US$321/ton). TSI's performance was better than our estimates of Rs24.4b as cost increases were less than our expectations.

-     EBITDA at TSE's operations declined by 35% QoQ to US$197m due to 5% lower volumes and a margin squeeze due to a 20% increase in raw material costs. EBITDA per ton declined 30% QoQ to US$55/ton.

 

To raise Rs70b equity to fund high RoI projects; Jamshedpur expansion on track; Upgrading FY11 EPS 14%

-     Tata Steel's board has approved the raising of Rs70b of equity related instruments for investing in high RoI projects (Indian Greenfield and overseas Raw Material). This will dilute equity by 10-15%.

-     The Jamshedpur expansion to 10mtpa is on track to be completed by December 2011. We are upgrading FY11 EPS by 14% to Rs74.4 to factor in stronger than expected performance in 2QFY11. The stock trades at an EV/EBITDA of 6x FY12E. Although valuations are not demanding, the near term outlook is challenging. Equity dilutions and significant capital deployment in future projects will limit the upside. Maintain Neutral.

 

Sanjay Jain (SanjayJain@MotilalOswal.com)

 

 

Tata Power (TPWR IN; Mkt Cap USD7.4b, CMP Rs1, 376, Neutral)

 

-     Exceptionals boost standalone/consolidated performance: Tata Power's 2QFY11 standalone revenue was Rs15.7b (down 9% YoY), EBITDA was Rs2.9b (down 31% YoY), and net profit was Rs2.5b. Reported PAT included several one-offs: (1) forex gain of Rs365.5m, and (2) Rs100m reversal of provision on doubtful debt. Adjusted for this PAT was Rs2.1b (up 35% YoY), marginally higher than our estimate of Rs1.8b, largely due to higher dividend income (Rs800m). Reported consolidated profits were Rs6.8b and adjusted for one-offs, the profit was Rs3.5b (up 12% YoY).

-     Coal mining EBIT up 6% YoY, stake sale transaction yet to take place: In 2QFY11, Tata Power's share of revenue from coal mining companies (KPC/Arutmin) was Rs15.4b (up 33% YoY). Coal production was 12.4mt (v/s 15.5mt) and realizations were US$73.7/ton (v/s US$57.9/ton in 2QFY10). Despite higher realizations, the contribution was limited due to higher production cash costs of ~US$38/ton (v/s US$31/ton in 2QFY10). EBIT for mining companies was Rs3.6b, up a mere 6% YoY. The transaction of ~15% stake sale in a mine Holdco to Olympus to raise US$300m has not yet been affected, pending approval from lenders and last date to sign the agreement had been extended to 19 November 2010.

-     Subsidiary/associate companies post robust performance: In 2QFY11 NDPL (51% stake) posted net profit of Rs741m (up 189% YoY) given higher incentives of Rs550m due to the achievement of targeted cuts in AT&C losses. Powerlinks Transmission (PTL, 51% stake) reported PAT of Rs275m (up 34% YoY) due to higher capitalization and availability based incentives. Tata Power Trading Company (TPTL, 100% stake) reported a loss of Rs20m, v/s Rs16m in 2QFY10.

-     Valuations and view: We expect TPWR to report consolidated net profit of Rs18.8b in FY11 (up 27% YoY) and Rs25.4b in FY12 (up 35% YoY). We arrive at an SOTP-based target price of Rs1,265/share. At CMP, the stock trades at a PER of 18x FY11E and 14x FY12E. Neutral.

 

Satyam Agarwal (Agarwals@MotilalOswal.com)/ Nalin Bhatt (NalinBhatt@MotilalOswal.com)

 

Ranbaxy Laboratories (RBXY IN; Mkt Cap USD5.6b, CMP Rs585, Sell)

 

Ranbaxy's 3QCY10 operating performance was below our estimates. Key highlights are:

-     Ranbaxy's 3QCY10 net sales grew 9.7% to Rs18.9b (vs est of Rs18.3b) while reported PAT grew 172% (on a low base) to Rs3.1b (vs est Rs2.1b). EBITDA de-grew 43% to Rs1.38b (vs est. of Rs1.84b).

-     Revenue growth was mainly led by 95% YoY increase in the revenues from USA and 22% growth in India formulations business (20% in INR-terms). This growth was partly tempered down by 4% decline in Europe, CIS & Africa region and a 19% decline in the AsiaPac & ME region.

-     EBITDA de-grew 43% to Rs1.38b (vs est of Rs1.84b) while EBITDA margin was at 7.2% (vs est of 9.8%). EBITDA was impacted by some provision and write-offs. Excluding these write-offs, EBITDA would have been in line.

-     Reported PAT at Rs3.1b was higher than our estimate of Rs2.12b mainly due to Rs2.6b of MTM forex gains on loans and forex hedges. Adj PAT was up 95% (on a low base) to Rs1b vs our estimate of Rs1.14b.

 

Valuation and view: Sustaining current valuations is mainly dependent on upsides from Lipitor & Nexium, it is imperative for Ranbaxy to salvage the upsides from these two opportunities which account for 60-70% of overall Para-IV upsides. We expect core EPS of Rs10.1 for CY11 and Rs15.9 for CY12 (assuming part recovery in the US). Our estimates exclude MTM forex gains and one-off upsides from Para-IV opportunities. Ranbaxy is currently valued at 49x CY11E core EPS and 31x CY12E core EPS. Our current DCF value of all potential Para-IV upsides is Rs91/sh. We believe that current valuations are discounting the best-case scenario for both the core business as well as for the Para-IV upsides. We downgrade the stock to Sell with TP of Rs490 (25x CY12E EPS + FTF DCF value of Rs91/sh).

 

Nimish Desai (NimishDesai@MotilalOswal.com)

 

Jubilant Organosys (JOL IN; Mkt Cap USD1.2b, CMP Rs313, Neutral)

 

Jubilant Organosys 2QFY11 performance was below estimates. Key highlights.

-     Topline grew by 5.7%YoY to Rs9.88b (vs estimate of Rs10.49b), while Adjusted PAT increased by 42.3%YoY on a low base (impacted due to Rs428m of forex losses) to Rs821m (vs estimates of Rs948m).

-     Overall, the Pharma and Life Sciences Products and Services (PLSPS) business reported revenue growth of 2.7%YoY to Rs8.5b while Agri & Performance Polymers (APP) business recorded 29%YoY growth to Rs1.38b.

-     EBITDA declined by 16.3%YoY at Rs1.55b and was below our estimate of Rs1.96b. EBITDA margins at 15.7% (down 410bps) were lower than estimate of 18.7% due to pricing pressure and adverse currency movement and adverse product mix in PLSPS segment.

-     Adjusted PAT increased by 42.3%YoY to Rs821m (vs estimate of Rs948m). Adjusted PAT reported growth despite decline in EBITDA on account of low base (impacted due to Rs428m of forex losses) and lower interest outgo due to reduction in debt.

 

We believe Jubilant is well positioned to exploit the expected increase in outsourcing from India. Customer inventory de-stocking for CRAMS companies is coming to an end and we expect growth to rebound in FY11 as customers are likely to commence re-stocking. Over the past few years, Jubilant has made two large acquisitions in North America which has strengthened its presence in the sterile segment but has also resulted in a highly leveraged balance sheet. We also believe that some of the past acquisitions (like Draxis) have been made at expensive valuations resulting in extended payback periods. High debt, large FCCB redemption (US$202m in May-2011 including YTM) and low RoCE (8-12%) remain an overhang. Based on our revised estimates the stock is valued at 15.4x FY11E EPS and 12.8x FY12E EPS. Maintain Neutral.

 

Nimish Desai (NimishDesai@MotilalOswal.com)