Tata Steel (CMP: Rs607)
Mkt Cap: Rs555bn; US$12.3bn Bloomberg code (TATA IN)
Tata Steel reported Q2FY11 consolidated EBITDA higher than our estimates at Rs36.7bn (our estimates of Rs29.9bn). While standalone EBITDA was in our estimates; European business EBITDA (US$56/tonne) surprised significantly (our estimates US$16/tonne); on the back of sharp surprise in realizations. We believe that the same could be on account of spill-over effect of higher prices in Q1 on contractual sale volumes. Consolidated net profit at Rs19.8bn (+8.4% qoq) was helped by higher other income on account of sale of non-core investments by Tata Steel India and Nat Steel Holdings. Consolidated debt remained at US$9.8bn. Jamshedpur expansion remains on track for commissioning by Oct'11; reflecting in a higher than expected capex guidance for FY11. Tata Steel board has approved raising of additional equity capital of upto Rs70bn (US$1.5bn); higher end of the total equity raising has surprised us and expect the same to result in a dilution of 5-8% of earnings.
Overall, we remain positive on Tata Steel. We see a marked change in Tata Steel over the next 8-10 quarters – both strategically and financially. Losses at the European operations have peaked and restructuring expenses are largely behind, and the business is set to achieve a leaner structure. Brownfield expansion has gathered momentum and will be commissioned a year from now. Post expansion in India, domestic operations will account for 34% of steelmaking capacity but for 63% of consolidated EBITDA. Also, production would commence at the overseas mines in Canada and Mozambique by FY12, which will lead to improved raw-material integration for the consolidated entity. All this, we believe, would lead to free cash generation and we expect Tata Steel to enter a phase of balance sheet de-leveraging over the next 2-3 years. We estimate net debt to reduce by 32% to Rs313bn by FY13E. The stock has underperformed Indian peers over the last 18 months but we believe a re-rating is on the cards. We maintain Outperformer with a 12-month price target of Rs811/share – 6.2x consolidated FY12E EV/EBITDA.
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