tata steel (tatste) | 622content.icicidirect.com/mailimages/idirect_tatasteel_q1fy18.pdf · tata...

August 8, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

Performs well…

Tata Steel reported a good set of Q1FY18 numbers wherein the

consolidated topline and EBITDA were above our estimates

Tata Steel’s sales volume from the Indian operations came in at 2.8

million tonnes (MT) while European operations (TSE) reported steel

sales of 2.4 MT, both in line with our estimates. The gross

consolidated topline was at | 30973 crore. After adjusting for excise

duty, net operating income (consolidated) was at | 29556.8 crore, up

17.2% YoY, higher than our estimate of | 28189 crore

The consolidated reported EBITDA came in at | 4974 crore (EBITDA

margin of 16.8%) higher than our estimate of | 4565.1 crore (EBITDA

margin of 16.2%). EBITDA/tonne of domestic operations came in lower

at | 10786/tonne (our estimate: | 12000/tonne). Tata Steel Europe

reported an EBITDA/tonne of ~US$80/tonne higher than our estimate

of US$75/tonne

The company reported forex gains of | 543 crore in subsidiaries

The company recognised exceptional items (expenses) amounting to

| 617 crore pertaining to provision towards mining related litigation in

India. Consequently, consolidated PAT (reported) was at | 921.1 crore

Healthy growth in domestic sales volume drives performance…

Tata Steel’s Indian operations registered healthy sales volume growth.

For Q1FY18, sales volumes stood at 2.75 MT up ~31% YoY. The sales

volume growth was notably higher compared to domestic steel

consumption growth of 4.6% in Q1FY18. For FY17, Tata Steel’s domestic

operations sales volume was at 10.97 MT up 15% YoY. Tata Steel’s

domestic sales volume growth for FY17 at 15% is notably higher than

domestic steel consumption growth of 3.0%. This reflects an increase in

Tata Steel’s market share in the domestic market. For FY18E, we model

sales volume of 12.0 MT and 12.5 MT for FY19E.

Kalinganagar operations ramp up well...

The company’s Jamshedpur plant has access to captive raw materials

(100% integration for iron ore and ~35% integration for coking coal). This

enables TSL to realise superior EBITDA margins compared to its domestic

peers. Tata Steel Kalinganagar (TSK) has achieved the fastest ramp up in

greenfield projects in India. It has achieved crude steel production of 1.68

MT in FY17.

TSE aids overall consolidated performance; maintain BUY…

Tata Steel reported healthy Q1FY18 numbers driven by healthy

operational performance by European operations. Going forward, on the

back of strength in global steel prices, we revise upward our estimates.

For domestic operations, we model an EBITDA/tonne of | 12000/tonne for

FY18E (upward revised from | 11000/tonne earlier) and | 13500/tonne for

FY19E (upward revised from | 12000/tonne earlier). For European

operations, we model EBITDA/tonne of US$75/tonne for FY18E (upward

revised from US$50/tonne earlier) and US$75 for FY19E (maintained). We

value domestic operations at 6.5x FY19E EV/EBITDA and overseas

operations at 5x FY19E EV/EBITDA. Subsequently, we arrive at a target

price of | 700 and maintain our BUY recommendation on the stock.

Rating matrix

Rating : Buy

Target : | 700

Target Period : 12 months

Potential Upside : 12%

What’s Changed?

Target Changed from | 550 to | 700

EPS FY18E Changed from | 47.0 to | 61.0

EPS FY19E Changed from | 64.2 to | 71.8

Rating Unchanged

Quarterly Performance

Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%)

Revenue 29556.8 25229.8 17.2 33896.0 -12.8

EBITDA 4973.9 3242.1 53.4 7025.3 -29.2

EBITDA (%) 16.8 12.9 398 bps 20.7 -390 bps

Rep. PAT 921.1 -3197.2 -128.8 -1167.9 -178.9

Adj. PAT 1532.0 363.6 321.3 -708.4 -316.3

Key Financials

(| Crore) FY15 FY16 FY17 FY18E FY19E

Net Sales 117151.6 112299.4 130651.0 135857.6

EBITDA 7585.6 17007.8 20138.6 22513.8

Adj Net Profit -2243.2 4092.1 5915.1 6966.7

EPS (|) NM -23.1 42.2 61.0 71.8

Valuation summary

FY16 FY17 P FY18E FY19E

PE (x) NA 14.8 10.2 8.7

Target PE (x) NA 16.6 11.5 9.7

EV/EBITDA(x) 18.7 8.2 6.8 5.9

P/BV (x) 2.0 1.6 1.7 1.5

Adj RoNW (%) -7.3 10.8 16.9 17.0

Adj RoCE (%) 2.1 9.4 12.2 12.5

Stock data

Particular Amount

Market Capitalization (| Crore) 60,349

Total Debt (FY17) (| Crore) 83,014

Cash & Cash Eq. (FY17) (| Crore) 17,458

EV (| Crore) 125,905

52 week H/L (|) 625 / 355

Equity capital | 970.2 Crore

Face value | 10

Price performance (%)

Return % 1M 3M 6M 12M

JSW Steel 9.6 17.6 19.1 33.5

Tata Steel 5.2 30.2 21.8 54.1

Research Analyst

Dewang Sanghavi

[email protected]

Akshay Kadam

[email protected]

Tata Steel (TATSTE) | 622


Variance analysis

Q1FY18 Q1FY18E Q1FY17 YoY (%) Q4FY17 QoQ (%)

Revenue 29,556.8 28,188.5 25,229.8 17.2 33,896.0 -12.8 The topline came in above our estimates

Other Income 155.5 3,713.4 136.7 13.8 152.2 2.2

The adjustment with respect to Tata Motors’ stake sale forms a part of

OCI. As per the new accounting standards, in the FY17 balance sheet,

Tata Steel’s investments in Tata Motors is valued at a fair value of |3896

crore as on March 31, 2017. During the quarter, the company received a

consideration of | 3778 crore. Hence, the differential in this regards is

recognised in other comprehensive income (negative ~| 118 crore). The

other comprehensive income (OCI) line item falls below the PAT line

Employee Expense 4,303.9 4,104.7 4,679.6 -8.0 4,216.9 2.1

Raw Material Expense 11,069.9 10,557.4 8,183.9 35.3 12,447.1 -11.1

Other operating Expenses 9,209.1 8,961.3 9,124.2 0.9 10,206.7 -9.8

EBITDA 4,973.9 4,565.1 3,242.1 53.4 7,025.3 -29.2 EBITDA was above our estimates

EBITDA Margin (%) 16.8 16.2 12.9 398 bps 20.7 -390 bps EBITDA margin was broadly in line with our estimates

Depreciation 1,501.1 1,651.7 1,241.7 20.9 1,589.2 -5.5

Interest 1,343.7 1,093.5 1,070.7 25.5 1,263.1 6.4

Exceptional Item 610.9 - 3,508.9 -82.6 4,065.8 -85.0

The exceptional item (expense) of | 617 crore pertains to provision

towards mining related litigation in India. | 6 crore income respresents

profit from JV's and Associates

PBT 1,673.7 5,533.3 (2,442.5) -168.5 259.4 -178.9

Tax Outgo 740.5 693.2 740.5 0.0 976.0 -24.1

PAT 933.2 4,840.0 (3,183.0) -129.3 (716.6) -230.2

Profit from discontinued operations (12.1) (14.5) (14.2) -14.8 (451.3) -97.3

Reported PAT for the Group 921.1 4,825.6 (3,197.2) -128.8 (1,167.9) -178.9

Adjusted PAT for the Group 1,532.0 4,825.6 363.6 321.3 (708.4) -316.3

Key Metrics

TSI Steel Sales (MT) 2.8 2.8 2.1 31.0 3.2 -14.1

TSE Steel Sales (MT) 2.4 2.4 2.5 -4.0 2.9 -17.2

Group Steel Sales (MT) 5.8 5.8 5.4 7.4 6.8 -14.7 Sales volume were in line with our estimates

TSI EBITDA/tonne (|/tonne) 10,786 12,000 10,351.0 4.2 13,470 -19.9 EBITDA/tonne was lower than our estimates

TSE EBITDA/tonne (US$/tonne) 80.0 75.0 50.6 58.1 104.0 -23.1 EBITDA/tonne was higher than our estimates

TSI: Tata Steel India; TSE: Tata Steel Europe

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change Comments

Total Operating Income (| crore) 128,232 130,651 1.9 132,177 135,858 2.8 Maintained for FY18E, revised upwards for FY19E

EBITDA (| crore) 17,741 20,139 13.5 18,764 22,514 20.0 Revised downwards for FY18E, upwards for FY19E

EBITDA Margin (%) 13.8 15.4 11.4 14.2 16.6 16.7

Adj PAT (| crore) 4,974 5,915 18.9 5,790 6,967 20.3 Revised downwards for FY18E, upwards for FY19E

Adj EPS (|) 51.3 61.0 18.8 59.7 71.8 20.3

FY19EFY18E


Assumptions

Comments

FY17E FY18E FY19E FY18E FY19E

TSI Steel Sales (MT) 11.0 12.0 12.5 12.0 12.5 Maintained estimates

TSE Steel Sales (MT) 9.9 10.0 10.0 10.0 10.0 Maintained estimates

Group Steel Sales (MT) 23.9 26.5 27.0 26.5 26.5 Maintained estimates for FY18E, revised upwards for FY19E

TSI EBITDA/tonne (|/tonne) 10,901.0 12,000.0 13,500 10,000.0 10,500.0 Revised upwards for both years

TSE EBITDA/tonne (US$/tonne) 71.0 75.0 75.0 75.0 75.0 Revised downwards for FY18E, maintained for FY19E

TSI: Tata Steel India; TSE: Tata Steel Europe

EarlierCurrent



Company Analysis

Healthy increase in domestic sales volume augurs well…

Tata Steel’s Indian operations registered healthy volume growth wherein

for Q1FY18 sales volumes were at 2.75 MT, up ~31% YoY. For FY17, Tata

Steel’s domestic operations sales volume was at 10.97 MT, up 15% YoY.

Tata Steel’s domestic sales volume growth for FY17 at 15% was notably

higher than domestic steel consumption growth of 3.0%, reflecting an

increase in Tata Steel’s market share in the domestic market. We model

sales volume of 12.0 MT for FY18E and 12.5 MT for FY19E.

Integrated Jamshedpur operations bode well in long run…

The company’s Jamshedpur plant has access to captive raw materials

(100% integration for iron ore and ~35% integration for coking coal). This

enables TSL to realise superior EBITDA margins compared to its domestic

peers. Going forward, over the next couple of years, we expect Indian

operations to clock an EBITDA/tonne of ~| 12000-13500/tonne, higher

than its peers.

Exhibit 1: Domestic volumes to grow at CAGR of ~8% in FY17E-19E…

8.5 8.8

9.5

11.0

12.0 12.5

0

2

4

6

8

10

12

14

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

million tonne


Exhibit 2: ...domestic EBITDA/tonne likely to augment further…

15043

11433

7388

10901

12000

13500

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

|/tonne


European operations witness strong operational turnaround in FY17...

The restructuring initiatives undertaken resulted in profitable operations in

Q1FY17, Q2FY17, Q3FY17 and Q4FY17 wherein the EBITDA/tonne came

in at US$50.6/tonne, US$67/tonne, US$38/tonne and US$104/tonne,

respectively, against negative EBITDA/tonne in preceding quarters of the

corresponding year. European operations for full year FY17 clocked an

EBITDA margin of 9.0% and an EBITDA/tonne of ~US$70/tonne.

During Q1FY18, European operations reported a healthy EBITDA/tonne of

~US$80/tonne (vs. EBITDA/tonne of US$ 50.6/tonne in Q1FY17).

TSL India outshines domestic demand in FY15 & FY16

3.3

12.913.8

2.7

9.0

15.0

6.7

3.3

0.6

3.1

4.3

3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

%

Tata Steel India YoY Domestic Steel Demand YoY



Exhibit 3: Trend in Tata Steel’s Europe’s volume…

13.9 13.7

13.0

9.9 10.0 10.0

5.0

7.0

9.0

11.0

13.0

15.0

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

million tonne


Exhibit 4: … TSE EBITDA/tonne to improve

34

50

-7

7175 75

-20

-10

0

10

20

30

40

50

60

70

80

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

US

$/tonne


Kalinganagar plant have ramped up well…

Tata Steel has expanded its domestic capacity by 3 MT from 9.7 MT

currently to 12.7 MT. The new plant been set up at Kalinganagar, Odisha

is within close proximity of the rich mineral belt. Expansion in the higher

margin domestic business augurs well for the company as sales volumes

from Indian operations would steadily increase in the overall volume mix.

The new facility has achieved the fastest ramp-up in greenfield project in

India. TSK has achieved crude steel production of 1.68 MT in FY17.

Exhibit 5: Share of domestic sales volume in overall group sales

26.6

26.3

26.3

23.9

26.5

27.0

8.5

8.8

9.5

11.0

12.0

12.5

32

3336

46 4546

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

%

million tonne

Tata Steel Group Tata Steel India India's Proportion to Total sales


Exhibit 6: Consolidated EBITDA margin trend

11.1

9.0

6.5

15.1 15.4

16.6

0

4

8

12

16

20

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

%

Tata Steel Group



Debt levels to remain stable

Gross debt during the quarter increased by | 4798 crore QoQ to | 87812

crore due to forex impact, inventory build-up in India due to GST

implementation and seasonal trends in Europe. Net debt was, however,

lower on account of build-up in cash reserves to fund the £550 million pay

out as a part of BSPS settlement.

Gross debt at | 83014 crore as on March 31 2017 increased by | 1028

crore YoY. Net debt at | 72367 crore increased by | 1268 crore YoY.

However, the same is expected to witness a declining trend in FY18E and

FY19E.

Exhibit 7: Net debt to remain stable

81986

83014

81414

80214

73635

72367

74928

71689

0

20000

40000

60000

80000

100000

FY2016 FY2017 FY2018E FY2019E

| crore

Gross Debt Net Debt

Source: Company, ICICIdirect.com Research, Net debt is Gross Debt minus Cash

Closure of BSPS…

The company is in advanced discussion with the BSPS Trustee, the

Pension Regulator and the Pension Protection Fund, in relation to

Regulated Apportionment Agreement (RAA) and is hopeful of reaching a

final agreement.


Conference call highlights & other key developments…

During the quarter, global steel production grew ~4% YoY and QoQ

aided by significant growth in China

Volatility in raw material price and subdued demand led to a marginal

decline in the global steel prices sequentially

The global economic confidence indicator suggests steel demand

growth is aided by supportive government measures

Political and policy uncertainty is a risk to global economic recovery

Despite stated capacity cuts, China steel production grew ~4% YoY

and ~9% QoQ during the quarter. However, Chinese exports were at

20.3 million tonne (MT), down 31% YoY, 2% QoQ. China’s

manufacturing and steel PMIs trended upwards in the quarter with a

marginal decline in June due to seasonal factors

Global trade was limited on account of improved steel consumption

in the past six months, increased protectionist measures, currency

appreciation and tightening of liquidity

Indian operations

The sales volume increased 28% YoY aided by smooth ramp up of

Kalinganagar facility (which helped increase volumes) and increase in

market share

The company saw strong growth in branded products, retail and

solutions segment, which increased 19% YoY, contributing ~48% of

revenues

On a sequential basis, inventory destocking across channel in the run

up to GST implementation led to a drop in volumes. Realisations were

also under pressure during the quarter. However, the company is

witnessing a recovery in prices on the back of strong domestic

demand and better international prices

During the quarter, construction and consumer durables witnessed

lower growth. While headline automotive sector grew at 8% YoY, CV

sales were down 21%. Steel consumption by the auto sector declined

Domestic demand declined ~5% QoQ while production was down

~4% QoQ. Exports in Q1 declined from 3.3 MT to 2 MT due to a

subdued global environment and rupee appreciation

Domestic steel prices were under pressure due to subdued global

environment and excess supply in India

The company rolled out its retail outlet Tata Steel Sampoorna. The

retail outlet will primarily serve the rural market

Tata Steel’s EBITDA during Q1FY18 was impacted by lower deliveries

and realisations, increased cost (due to lower absorption of fixed cost,

higher maintenance cost and higher coal cost) and decline in ferro

chrome prices (that impacted the FAMD operating performance)

The company has a positive outlook on the Indian steel market given

the thrust on infrastructure and affordable housing along with

increased emphasis on buying domestic manufactured steel for

government projects under the new steel policy. The company

expects a drop in interest rates and inflation to trigger a consumption

cycle, which will help the retail segment and overall steel demand.

The company also expects rural demand to recover on account of

good monsoons, higher MSP for crops and loan waivers. However,

the appreciating rupee remains a concern


European Operations

The Euro zone economy grew by 0.6% QoQ during the first quarter of

CY17. UK economic growth slowed to 0.2% QoQ as consumer

spending growth decelerated to levels last seen in 2014

EU steel demand growth was relatively strong in Q1FY17 (3.1% YoY)

driven by growth in the automotive and construction sectors

During the quarter, domestic deliveries increased 4.7% to 1.6 MT and

imports increased 4.3% to 280 KT. However, preliminary data shows

a rise in imports over April-May suggesting EU mills have most likely

lost market share to imports

The operating performance during the quarter was marked by

increased in production by ~7% both QoQ and YoY. The reduction in

deliveries in Q1, follows the higher deliveries in the seasonally strong

Q4. The YoY reduction in deliveries is on account of finalisation of exit

from non-core market

EBITDA during the quarter was impacted by increase in realisations,

broadly consistent production volume, cost changes (impacted by

higher raw material prices particularly coking coal) and improved

central and other due to one off impairment charges in the prior

quarter

The management expects the EU economy to grow 2.2% in 2017. The

UK economy is forecast to grow slower by 1.7% as higher inflation

weakens consumers spending growth

European steel demand is expected to grow 1.9% in 2017 in line with

modest economic growth. European steel mills are expected to

continue to be under pressure from imports. The increasing

protectionism may lead to global trade flow distortions

South East Asia Operations

EBITDA declined by 88% YoY due to lower scrap prices – rebar local

spreads in the region and weak market conditions particularly at

NatSteel

Singapore construction sector declined ~6% during the quarter,

which led to significant increase in competitive intensity

Weak labour and property markets continue to pose threat to the

economic recovery and steel prices

Thailand steel consumption declined in the absence of new projects

and weaker sentiments

Nat Steel Holdings: Deliveries were flat QoQ and down 8% YoY due

to weak market conditions. Lower spread and increased

competitiveness impacted profitability. The company continues to

focus on export driven strategy

Tata Steel Thailand: Deliveries declined 20% QoQ due to weak

construction demand. Decline in spreads impacted profitability. The

wire rod business sustained the growth momentum

The management expects weak market conditions to prevail in

Singapore and Thailand


Other Highlights

Global steel prices in the past four or five weeks have witnessed an

uptick of ~US$80-100/tonne

For domestic operations, the management has guided exports

volume at ~10% (~1.2 MT) of total Indian sales volume

For the FAMD division, the management has guided expansion in

ferrochrome production from 1.3 MT currently to 1.7 MT in FY18 (as

the chrome ore mine come in for renewal in FY20)

Gross debt during the quarter increased by | 4798 crore due to forex

impact, inventory build-up in India due to GST implementation and

seasonal trends in Europe

Gross debt was at | 87812 crore while net debt was lower at | 71703

crore due to build up in cash reserves to fund the £550 million pay out

as a part of BSPS settlement

The liquidity position remained robust with cash and cash

equivalents, current investments including undrawn bank lines

amounting to | 23827 crore

The company against its capex guidance of ~| 7000 crore for FY18,

incurred ~| 1484 crore during the quarter

The company sold its stake in Tata Motors for a gross consideration

of | 3778 crore. With the sale, the company has monetised ~| 14266

crore of disinvestment over the last five years

In a matter related to production during FY01-10, the Supreme Court

issued its final judgement on August 2, 2017, which directs that 100%

of the notional value in excess of the limit specified by the

Environmental Clearance needs to be paid by miners. Tata Steel is yet

to receive any notification from the Government of Odisha. However,

in view of the judgement, a provision of | 614.41 crore has been

recognised towards the same in the quarter

The management indicated that the strategic portfolio restructuring at

the European operations focusing on strip business is now completed

with the sale of 42-inch and 84-inch pipe mills at Hartlepool, UK to

Liberty House Group

The company is in advanced discussion with the BSPS Trustee, the

Pension Regulator and the Pension Protection Fund in relation to RAA

and is hopeful of reaching a final agreement


Key takeaways from annual report 2017…

Tata Steel titled its FY17 annual report ‘Towards a Sustainable Future’

and highlight investments in 6 key capital – Financial, Manufactured,

Intellectual, Human, Social & Relationship, and Natural.

The chairman’s message chalks out the strategic priorities for the

company, going forward. Tata Steel’s strategic priorities will be to

focus on the Indian market, achieving operational excellence and

deliver value added and differentiated products to its customers.

Additionally, Tata Steel Europe is currently pursuing the pension

restructuring programme in the UK and is hopeful of concluding its

soon.

The performance of the Tata Steel Group improved significantly

during the year on the back of enhanced performance of Jamshedpur

operations, ramping up of capacity in Kalinganagar and very critical

restructuring initiatives and performance transformation programme

in Europe.

During the year the company focused on enhancing the operating

performance and productivity, undertook several restructuring of the

portfolio, introduced new and differentiated products and solutions to

the customers and optimised working capital management under

volatile market conditions to turnaround the company’s performance.

The management highlighted that the new greenfield Kalinganagar

plant in Odisha is seeing a ramping up of operations to its rated

capacity at within a very short span of time. Thus, it demonstrates the

company’s commitment to execute large and complex projects, it

capability to quickly stabilise and scale up operations and strength of

its commercial network to service new customer segments

profitability. TSK is likely to be most competitive growth opportunities

for the company apart from the potential inorganic growth options

Tata Steel Kalinganagar achieved the fastest ramp-up in a greenfield

project in India. Crude steel production in FY17 was 1.68 MT. The

crude steel capacity was ramped up to 88% with the coke plant & hot

strip mill reaching 100% capacity in FY17

Tata Steel Europe (TSE) is currently pursuing the pension

restructuring programme in the UK. Based on the ongoing risk and

opportunities of the European portfolio, the company will continue to

pursue initiatives to strengthen the business profile of TSE in the

European steel industry. The company is investing in improving the

asset reliability and product mix especially in Netherlands through the

Strategic Asset Roadmap (STAR Programme). This will enable the

company to focus on creating high strength steel and polymer

capability, enhance productivity, strengthen downstream business

and increase the share of high value products

The company as a global and integrated steel player has adopted a

holistic business model that looks at the entire value chain. The steel

value chain (from captive mining to downstream steel business)

contributes ~92% to the total revenues. The raw material value chain

(from mining of chrome and manganese ore to production and sale of

ferro alloys and minerals) contribute ~7% to the revenues. The rest

1% comes from other businesses like manufacturing of agricultural

equipment and bearings


Outlook and valuation

Tata Steel reported a healthy set of Q1FY18 numbers driven by healthy

operational performance of European operations. Going forward, on the

back of strength witnessed in global steel prices, we upward revise our

estimates. For domestic operations, we model an EBITDA/tonne of

| 12000/tonne for FY18E (upward revised from | 11000/tonne earlier) and

| 13500/tonne for FY19E (upward revised from | 12000/tonne earlier). For

European operations, we model EBITDA/tonne of US$75/tonne for FY18E

(upward revised from US$50/tonne earlier) and US$75 for FY19E

(maintained). We value the domestic operations at 6.5x FY19E EV/EBITDA

and overseas operations at 5x FY19E EV/EBITDA. Subsequently, we arrive

at a target price of | 700 and maintain our BUY rating on the stock.

Exhibit 8: Target price calculation

( | Crore ) FY19E

Tata Steel India EBITDA FY19E (A) 16876

EV/EBITDA Multiple Assigned (B) 6.5

Tata Steel Europe & Other Subs EBITDA FY18E (C) 5639

EV/EBITDA Multiple Assigned (D) 5

Tata Steel Total EV (E = A*B + C*D) 137888

Tata Steel Gross Debt (F) 80214

Cash & Cash Eq (G) 11710

Minority Interest (H) 1492

Net Debt (I = F-G+H) 69996

Implied Market Cap (K = E-I+J) 67892

No of Shares (L) 97.02

Target Price (K/L) 700


Exhibit 9: Valuation matrix

Total Op. Income Growth EPS Growth PE EV/EBIDTA P/ BV RoNW RoCE

(| Crore) % YoY (|) % YoY (x) (x) (x) (%) (%)

FY15 138318.9 -6.1 NM NM NM 10.6 1.8 0.0 5.8

FY16 115951.7 -16.2 -23.1 NM NA 18.7 2.0 -7.3 2.1

FY17P 111562.1 -3.8 42.2 LP 14.8 8.2 1.6 10.8 9.4

FY18E 129663.9 16.2 61.0 44.6 10.2 6.8 1.7 16.9 12.2

FY19E 134803.4 4.0 71.8 17.8 8.7 5.9 1.5 17.0 12.5



Recommended History vs. Consensus

0.0

10.0

20.0

30.0

40.0

50.0

60.0

100

200

300

400

500

600

Aug-17May-17Mar-17Dec-16Oct-16Aug-16May-16Mar-16Dec-15Oct-15

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events

Date Event

Dec-16

As per media sources, Tata Steel is in discussions with foreign companies for investment in heavy industries over the next five years at the special economic zone

project at Gopalpur in Odisha

Jan-17

Tata Steel executes definitive agreements to acquire a majority stake (51%) in the Creative Port Development Pvt Ltd and their promoters for the proposed

development of Subarnarekha Port at Chaumukh village of Balasore district in Odisha. As per agreements, TSL will acquire a majority equity stake in CPDPL, and the

port development is envisaged through a wholly-owned subsidiary, Subarnarekha Port Pvt Ltd (SPPL). The acquisition and development is subject to certain

conditions precedent, detailed technical assessments and financial closure. The current outlay for the agreement is at | 120 crore

Feb-17

Tata Steel UK signs definitive sale agreement to sell its speciality steel business to Liberty House Group for a consideration of £100 million. The sale agreement

covers South Yorkshire based assets including electric arc, steel works and bar mill at Rotherham, the steel purifying facility at Stocksbridge and a mill in Brinsworth

as well as service centres in Bolton and Wednesburg, UK and X'ian, China. The completion of the transaction remains subject to receipt of necessary regulatory

approvals. Liberty Group had earlier signed an letter of intent (LoI) for the same

Mar-17

Tata Steel UK completes the consultation process with its employees to close the British Steel Pension Scheme (BSPS) to future accrual. Accordingly, it will close

the BSPS to future accrual from March 31. A new and competitive defined contribution pension scheme will be introduced thereafter

May-17

India Ratings (Ind-Ra) maintains rating watch evolving (RWE) on Tata Steel's credit rating of IND AA/IND A1+. The RWE reflects the uncertainty regarding the

divestments and/or formation of joint ventures (JVs) pertaining to TSL’s European operations. Ind-Ra expects to resolve the rating watch by October 2017, after it

gains greater clarity on the same

Jun-17 Tata Steel sells 8.35 crore shares of Tata Motors to Tata Sons at a price of | 452.8/ share (excluding brokerage and STT) resulting into a cash inflow of | 3783 crore.

Jun-17 Tata Steel completes disinvestment of its entire equity stake in the 50% joint venture Tata Elastron SA to Elastron SA for a consideration of € 0.37 million

Jun-17

Tata Steel completes sale of its 42 inch and 84 inch submerged arc weld (SAW) pipe mills in Hartlepool to Liberty House Group. The two mills are independent of the

company's strip products supply chain in the UK. Tata Steel did not disclose the consideration involved in the deal


Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Tata Group of Companies 31-Mar-17 0.3 301.8 0.0

2 Life Insurance Corporation of India 31-Mar-17 0.1 122.1 -9.7

3 HDFC Asset Management Co., Ltd. 31-Mar-17 0.0 41.1 -7.9

4 ICICI Prudential Asset Management Co. Ltd. 31-Mar-17 0.0 24.1 8.2

5 Reliance Nippon Life Asset Management Limited 31-Mar-17 0.0 23.5 2.8

6 Norges Bank Investment Management (NBIM) 31-Mar-17 0.0 11.0 2.2

7 The New India Assurance Co. Ltd. 31-Mar-17 0.0 10.8 -0.3

8 Abu Dhabi Investment Authority 31-Mar-17 0.0 10.7 -1.0

9 Dimensional Fund Advisors, L.P. 30-Jun-17 0.0 10.6 0.0

10 BlackRock Institutional Trust Company, N.A. 30-Jun-17 0.0 9.3 0.2

Source: Reuters, ICICIdirect.com Research

(in %) Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

Promoter 31.4 31.4 31.4 31.4 31.4

FII 13.2 13.6 13.0 14.0 13.7

DII 27.2 29.2 30.8 30.7 30.3

Others 28.2 25.8 24.8 23.9 24.7

Recent Activity

Investor name Value (m) Shares (m) Investor name Value (m) Shares (m)

ICICI Prudential Asset Management Co. Ltd. 60.8 8.2 Life Insurance Corporation of India -72.2 -9.7

DSP BlackRock Investment Managers Pvt. Ltd. 28.7 3.7 HDFC Asset Management Co., Ltd. -58.9 -7.9

Reliance Nippon Life Asset Management Limited 20.6 2.8 APG Asset Management -43.9 -5.9

Norges Bank Investment Management (NBIM) 16.7 2.2 Capital International, Inc. -7.1 -1.2

L&T Investment Management Limited 9.3 1.1 Lyxor Asset Management -8.3 -1.1

Buys Sells

Source: Reuters, ICICIdirect.com Research


Financial summary (Consolidated)

Profit and loss statement (| crore)

(Year-end March) FY16 FY17 FY18E FY19E

Net Sales 115951.7 111562.1 129663.9 134803.4

Other Operating Income 1199.9 737.4 987.1 1054.2

Total Operating Income 117151.6 112299.4 130651.0 135857.6

Growth (%) -16.2 -3.8 16.2 4.0

Raw Material Expenses 44816.1 39304.9 51998.5 52245.9

Employee Expenses 19966.8 17252.2 18492.7 19315.5

Purchase of Power 5433.6 0.0 6896.2 7082.5

Other expenses 39349.4 38734.5 33125.1 34699.9

Total Operating Expenditure 109565.9 95291.6 110512.4 113343.8

EBITDA 7585.6 17007.8 20138.6 22513.8

Growth (%) -39.5 124.2 18.4 11.8

Depreciation 5081.8 5672.9 6072.4 7491.3

Interest 4128.6 5072.2 5096.1 5112.1

Other Income 3925.7 527.5 561.6 565.3

PBT 2300.8 6790.2 9531.8 10475.7

Exceptional Item -3974.9 -4316.6 -617.0 0.0

Total Tax 1505.0 2778.0 2941.9 3457.0

PAT -3179.0 -304.4 5972.9 7018.7

Growth (%) LP -90.4 -2062.3 17.5

Minorities, Associates etc 129.7 -64.2 -57.8 -52.0

Rep PAT after Assoc., MI -3049.3 -368.6 5915.1 6966.7

Adj PAT after Assoc., MI -2243.2 4092.1 5915.1 6966.7

Growth (%) NM -282.4 44.6 17.8

EPS (|) -23.1 42.2 61.0 71.8


Cash flow statement (| crore)


Profit after Tax -3049.3 -368.6 5915.1 6966.7

Add: Depreciation 5081.8 5672.9 6072.4 7491.3

(Inc)/dec in Current Assets -3635.8 6666.0 -6822.9 -1714.9

Inc/(dec) in CL and Prov. 1701.3 -1134.7 8832.3 669.8

Others 20.4 7125.2 0.0 0.0

CF from operating activities 118.4 17960.8 13996.9 13412.8

(Inc)/dec in Investments -3345.6 -5736.1 4959.1 -4000.0

(Inc)/dec in Fixed Assets -4128.3 -27551.4 -6383.0 -5200.0

Others -49.6 -52.5 -57.8 -52.0

CF from investing activities -7523.5 -33340.1 -1481.7 -9252.0

Issue/(Buy back) of Equity 0.0 -20.0 0.0 0.0

Inc/(dec) in loan funds 5503.0 -3190.0 -1600.0 -1200.0

Dividend paid & dividend tax 179.9 -908.1 -908.1 -1021.7

Inc/(dec) in Share Cap 0.0 8342.2 -8342.2 0.0

Others -311.0 9360.6 0.0 0.0

CF from financing activities 5371.9 13584.7 -10850.4 -2221.7

Net Cash flow -2033.1 -1794.6 1664.8 1939.2

Opening Cash 8748.8 6715.6 4921.1 6585.9

Closing Cash 6715.6 4921.1 6585.9 8525.1


Balance sheet (| crore)


Liabilities

Equity Share Capital 970.2 970.2 970.2 970.2

Hybrid Perpetual securities 2,275.0 2,275.0 2,275.0 2,275.0

Reserve and Surplus 27508.6 34574.1 31855.8 37800.9

Total Shareholders funds 30753.9 37819.3 35101.1 41046.1

Total Debt 86204.0 83014.0 81414.0 80214.0

Deferred Tax Liability 2904.9 10030.1 10030.1 10030.1

Minority Interest & Others 1674.2 1601.7 1543.9 1491.9

Total Liabilities 121537.0 132465.1 128089.1 132782.1

Assets

Gross Block 177463.1 183767.2 192767.2 206767.2

Less: Impairment 15692.0 0.0 0.0 0.0

Less: Acc Depreciation 89582.5 95255.4 101327.7 108819.0

Net Block 72188.6 88511.8 91439.5 97948.2

CWIP 10228.8 15784.1 13784.1 4984.1

Investments 6800.6 12536.7 7577.6 11577.6

Goodwill on Consolidation 13719.4 3494.7 3494.7 3494.7

Inventory 20356.0 24803.8 32053.8 30631.8

Debtors 11701.2 11586.8 14209.7 13295.7

Loans and Advances 19688.7 7587.4 4437.4 8388.4

Other Current Assets 1829.3 2931.1 3031.1 3131.1

Cash 6715.6 4921.1 6585.9 8525.1

Total Current Assets 60290.8 51830.2 60318.0 63972.0

Current Liabilities 29197.3 18574.5 28406.8 30076.6

Provisions 12515.8 22003.9 21003.9 20003.9

Current Liabilities & Prov 41713.1 40578.4 49410.7 50080.5

Net Current Assets 18577.7 11251.8 10907.2 13891.5

others 21.9 885.9 885.9 885.9

Application of Funds 121537.0 132465.1 128089.1 132782.1


Key ratios


Per share data (|)

Adj EPS -23.1 42.2 61.0 71.8

Cash EPS 29.3 100.6 123.6 149.0

BV 317.0 389.8 361.8 423.1

Adj BV (adj for Goodwill) 175.6 353.8 325.8 387.0

DPS 8.0 8.0 8.0 9.0

Cash Per Share 69.2 50.7 67.9 87.9

Operating Ratios (%)

EBITDA Margin 6.5 15.1 15.4 16.6

PBT / Total Operating income 2.0 6.0 7.3 7.7

Adj PAT Margin -1.9 3.6 4.5 5.1

Inventory days 185 210 225 214

Debtor days 39 38 40 36

Creditor days 261 199 175 216

Return Ratios (%)

Adj RoE -7.3 10.8 16.9 17.0

Adj RoCE 2.1 9.4 12.2 12.5

RoIC 2.3 9.8 12.8 13.3

Valuation Ratios (x)

P/E NA 14.8 10.2 8.7

EV / EBITDA 18.7 8.2 6.8 5.9

EV / Net Sales 1.2 1.3 1.1 1.0

Market Cap / Sales 0.5 0.5 0.5 0.4

Price to Book Value 2.0 1.6 1.7 1.5

Price to Adj Book Value 3.6 1.8 1.9 1.6

Solvency Ratios

Debt/EBITDA 11.4 4.9 4.0 3.6

Debt / Equity 2.8 2.2 2.3 2.0

Current Ratio 1.4 1.3 1.2 1.3

Quick Ratio 1.0 0.7 0.6 0.7



ICICIdirect.com coverage universe (Metals & Mining)

CMP M Cap

(|) TP (|) Rating (| Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Coal India 249 280 Hold 154688 14.9 18.8 20.3 17.8 14.2 13.1 9.3 8.0 7.0 33.5 37.9 37.4 37.8 39.2 37.2

Hindustan Zinc 286 310 Buy 120793 19.7 23.6 26.5 14.2 11.9 10.6 9.7 7.7 6.1 26.9 33.4 31.8 27.0 26.8 25.2

JSW Steel 228 240 Buy 55173 14.3 20.8 22.0 15.1 10.4 9.9 7.7 6.9 6.7 13.4 14.8 14.2 15.3 18.8 16.9

Vedanta 289 285 Hold 85644 15.1 27.6 34.1 18.2 10.0 8.1 5.3 4.6 3.9 12.1 14.2 15.3 9.3 15.0 16.0

Tata Steel 576 700 Buy 170740 42.2 61.0 71.8 14.8 10.2 8.7 8.2 6.8 5.9 9.4 12.2 12.5 10.8 16.9 17.0

Company

EV/EBITDA (x)EPS (|) P/E (x) ROE(%)ROCE(%)



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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

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ICICIdirect.com Research Desk,

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