tatirosc_20100615

8/8/2019 TATIROSC_20100615

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June 15, 2010

ICICIdirect.com | Equity Research

Result Update

WHAT’S CHANGED…PRICE TARGET ............................................................. Changed from Rs 450 to Rs 517EPS (FY11E) ........................................................... Changed from Rs 47.91 to Rs 45.87EPS (FY12E) ........................................................... Changed from Rs 58.28 to Rs 61.03RATING................................................................................Changed from SELL to ADD

Strong comeback but challenges remain…Tata Steel staged a STRONG comeback in Q4FY10 with sequential netsales and net profit growth of 5% and 415% respectively on the back of~5% QoQ increase in sales volume and flat blended realisations.

EBITDA margins came in at a much improved level of 19.4% on the backof increase in EBITDA/tonne at Corus to US$94/tonne. Net profit forFY10 remained in negative due to large realised losses in H1FY10.Though we expect earnings to improve in FY11E & FY12E on the back ofoperational savings, improvement in steel prices and higher capacityutilization but balance sheet concerns with high leverage, increase incontracted raw material costs at Corus level and looming further equitydilution makes us believe that the company needs to overcome strongchallenges ahead.

Exceptional performance in H2FY10

The management has delivered better than its guidance in terms ofH2FY10 performance with Indian operations reporting an EBITDAmargin of 44% (as against 33% in H1FY10) and Corus benefiting

from higher capacity utilization and reduced costs resulting inpositive EBITDA to the tune of Rs 2300 crores (as against losses ofRs 3655 crores in H1FY10.

Positive guidance maintained for Corus

The company has maintained its positive outlook for Corus withcapacity utilization in excess of 85% in H1FY11E and cost reductioninitiatives expected to realize benefits of 250 million pounds in FY11.The company expects steel price trends to fully account for rawmaterial cost inflation in FY11 at Corus.

ValuationAt the CMP of Rs 484, the stock trades at consolidated FY11E PE of 7.9xand FY11E EV/EBITDA of 5.3x. Factoring in the better-than-expectedperformance and improved outlook, we value the company at 5.5xconsolidated FY12E EV/EBITDA to arrive at a revised target of Rs 517 forthe stock. We change our stance on the stock and assign it an ADD rating.

Exhibit 1: Performance Highlights (Consolidated)(Rs Crore) Q4FY10 Q4FY10E Q4FY09 Q3FY10 YoY (Chg %) QoQ (Chg %)Net Sales 27503.8 29034.5 26431.0 26202.0 4.1 5.0EBITDA 4750.2 4306.6 33.0 2950.6 14281.3 61.0EBITDA Margin (%) 17.3 14.8 0.1 11.3 + 1720 bps + 600 bpsDepreciation 1094.6 1213.5 928.3 1154.7 17.9 -5.2Interest 660.0 836.1 733.7 763.0 -10.0 -13.5Reported PAT 2434.1 1266.9 -4839.0 472.6 LP 415.0EPS (Rs) 27.4 14.3 -66.3 5.3 LP 415.0

Source: Company, ICICIdirect.com Research

Tata Steel (TISCO)Rs. 484

ting matrix ing : ADD get : Rs 517get Period : 12 monthsential Upside : 7 %

y Financials (Consolidated)s Crore) FY09 FY10 FY11E FY12E

t Sales 145686.3 101757.8 113915.8 123045.4

ITDA 18127.7 8042.7 14304.7 16227.3

t Profit 4950.9 -2009.2 4067.7 5411.9

luation summary (Consolidated)FY09 FY10E FY11E FY12E

(x) 7.1 NA 10.6 7.9

rget PE (x) 6.6 NA 9.8 7.4

V/EBITDA (x) 4.3 10.4 6.3 5.3BV (x) 2.7 3.1 2.6 1.9

NW (%) 17.4 -7.1 13.0 15.2

CE (%) 15.0 4.2 10.8 12.6

ock data arket Capitalisation Rs 42934 Crorebt (FY09) Rs 53396.4 Croresh & Invst (FY09) Rs 12318.8 Crore

V Rs 84011.6 Croreweek H/L 739/330uity capital Rs 886.7 Crorece value Rs 10F Holding (%) 23.9

Holding (%) 20.8 ce movement (Stock vs. Nifty)

0100200

300400500600700800

Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10

( I n R s )

0

1000

2000

3000

4000

5000

6000

( I n U n i t s )

Tata Steel Nifty

nalyst’s name ankaj [email protected]

outam [email protected]

bhisar [email protected]

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Tata Steel (TISCO)


Q4FY10 Result AnalysisTata Steel’s group performance improved further in Q4FY10 on the backof strong EBITDA situation at Corus and continuation of robustperformance of Indian operations. Corus managed to achieve an EBITDAof ~US$94/tonne as TCP plant was mothballed mid-way during the

quarter and product prices witnessed an up move. Asian subsidiaries hadan average quarter with subdued EBITDA performance due to closing ofgap between rebar and scrap prices in Asian markets whereas strongdemand in domestic market backed by infrastructure and rural spendensured excellent standalone performance by Tata steel’s Indianoperations with EBITDA margins of 43.3%.

Exhibit 2: Tata Steel group performance – Q4FY10

Particulars (Rs Crore)Tata Steel-

IndiaTata Steel-

Europe NSA(*)Tata Steel-

ThailandTata Steel -Group (**)

Sales volume (MT) 1.7 3.9 0.6 0.3 6.5Turnover 7225.5 17091.1 1486.8 907.3 27503.0Realisation/tonne (Rs) 42502.8 43823.4 24779.5 30244.5 42312.3EBITDA 3130.7 1644.0 49.4 13.5 5331.7EBITDA Margin (%) 43.3 9.6 3.3 1.5 19.4EBITDA/tonne (Rs) 18416.1 4215.3 823.5 449.2 8202.6* NSA steel operations only , ** Includes profits from JV's & Subsidiaries


Exhibit 3: Per tonne analysis - ConsolidatedRs/Tonne Q4FY10 Q4FY09 Q3FY10 YoY (%) QoQ (%)Net Realization 41906.0 41313.4 41978.3 1.4 -0.2Total Cost 35005.6 43996.6 37441.9 -20.4 -6.5

Stock Adjustment 714.4 7343.8 -1302.2

Raw Material Consumed 11436.2 12031.8 12934.9 -5.0 -11.6Employee Expenses 6061.2 6435.7 6763.1 -5.8 -10.4Purchase of power 1520.2 1882.9 1746.3 -19.3 -12.9Freight & Handling 2291.8 2173.9 2327.0 5.4 -1.5Other Expenses 8940.3 8204.8 9725.1 9.0 -8.1

EBITDA 7307.9 55.0 4751.3 13175.1 53.8Source: Company, ICICIdirect.com Research

Exhibit 4: Tata steel Europe performanceParticluars (US$ Mn) Q4FY10 Q4FY09 YoY Gr % FY10 FY11ELiquid Steel production 3.7 2.8 32.1 15 15Steel Deliveries 3.9 3.5 11.4 14.7 15.5

Turnover 3805.0 3700.0 2.8 1465.9 16551.9Realisation/tonne (US$) 975.6 1057.1 -7.7 99.7 1067.9EBITDA 366.0 -318 LP -30.1 852.5EBITDA Margin (%) 9.6 -8.6 NA -2.1 5.2EBITDA/tonne (US$) 93.8 NA NA -2.0 55.0


The company reported 19.4% EBITDA margins, upsmartly from 11.3% in Q3FY10 as Corus reported surgein profitability on EBITDA level. Overall group EBITDAcame in at a robust Rs 8202/tonne on account ofbetter-than-expected performance from Corus.

Blended realisations/tonne have remained largelyflat. EBITDA/tonne has shown a smart improvementto Rs 7308/tonne due to lower raw material costsand reduction in other expenses (sequentially)through cost saving measures like ‘Fit for Future’

and ‘Weathering the storm’ at Corus. Total costdipped by ~7% QoQ on a per tonne basis due tosustained efforts of lowering costs and improvingefficiencies

Management has been able to deliver on its H2FY10guidance of positive EBITDA for Corus with anEBITDA/tonne of ~US$38/tonne achieved in Q3FY10and ~US$94/tonne in Q4FY10. We expect

profitability to be muted in Corus going forward mainlydue to increase in contracted raw material costs andconcerns of slow recovery in European markets.

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Tata Steel (TISCO)


Subsidiary wise performance – Improvements to continueTata steel’s subsidiary performance shows clear domination of Indianoperations in terms of profitability with EBITDA/tonne of ~US$410 inQ4FY10, up from US$290/tonne in Q3FY10. Company’s Europeanoperations have also shown a smart jump in profitability withEBITDA/tonne at US$94/tonne in Q4FY10. We expect company’s Indianoperations to maintain strong performance on the back of raw materialintegration and strong domestic demand. Corus is expected to showmuted profitability with an EBITDA of US$55/tonne in FY11E as more thanexpected increase in raw material prices is expected to offset the rise insteel prices and cost savings.

Exhibit 5: Performance metricsQ4FY10 Q4FY09 Q3FY10 FY11E FY12E

IndiaSales Volume 1.7 1.8 1.6 6.6 6.9Blended Realisation/tonne 946.7 813.4 849.4 972.0 1006.8EBITDA/tonne 410.2 183.9 290.4 381.0 407.8

Europe (Corus)Sales Volume 3.9 3.5 3.8 15.5 16Realisation/tonne 975.6 1057.1 958.2 1067.9 1121.3EBITDA/tonne 93.8 -106.9 37.8 55.0 65.0

Singapore (Natsteel)Sales Volume 0.6 0.4 0.6 2.4 2.4Realisation/tonne 573.7 805.0 545.9 650.0 682.5EBITDA/tonne 19.1 -7.5 23.3 35.0 45.0

Thailand (TSTH)Sales Volume 0.3 0.2 0.3 1.2 1.2

Realisation/tonne 592.4 440.0 581.6 650.0 650.0EBITDA/tonne 8.8 10.0 27.2 30.0 35.0

Group ConsolidatedSales Volume 6.5 6.0 6.2 25.7 26.5Realisation/tonne 932.9 926.3 902.5 984.7 1030.3EBITDA/tonne 162.7 1.2 102.1 123.7 135.9

USD/INR 44.9 44.8 46.5 45.0 45.0* Sales volume in MT, Realisation and EBITDA in US$/tonne


Other major developmentsDebt management being pursued actively

• Tata steel India prepaid US$ 445 Mn of rupee debt and US$ 300Mn of foreign loans in Q3 & Q4 FY10 respectively.

• Tata steel India raised US$ 634 Mn via rupee loans, US$ 479 Mnvia NCDs and US$ 46 Mn via foreign currency loans.

Raw material integration for Corus progressing well• Construction of Stage 1 in Riversdale Benga project is slated to be

completed by H2CY11 resulting in 5.3 million ROM tonnes perannum at full capacity

• In New Millennium Corporation project of direct shipping ore,production of 4 MT of sinter fines is expected from Q3CY11 at aCAPEX of C$300 million.

• Proven and probable coal reserves in Mozambique increase to502 MT.

Sales volume have remained almost flat QoQ acrossvarious subsidiaries but blended realisations/tonnehave improved in the range of 3-10% in Asianoperations and ~2% in Corus due to better productmix and rising steel prices. We expect realisations

to remain firm across all operations in FY11E withproduct prices witnessing strength on the back ofraw material cost push. EBITDA level is expected tobe maintained at Indian operations but wouldwitness moderation at European operations due tosevere raw material cost push

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Tata Steel (TISCO)


Product price TrendSteel prices have seen some correction in the last few weeks after movingup smartly in the first few months of CY10. HR coil prices are currentlyhovering in the range of US$630-680/tonne in the global markets. Higherraw material prices in the spot markets are providing the cost relatedpush and support to steel product prices.

Exhibit 6: HR Coil CIS export price black sea (US$/tonne)

200

400

600

800

1000

1200

M a r - 0 8

J u n - 0 8

S e p - 0 8

D e c - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

( I n U S D / t o n n e )

Source: Bloomberg, ICICIdirect.com Research

Exhibit 7: HR Sheet price - China

300

400

500

600

700

800

900

1000

F e b - 0 8

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

( I n U S $ / t o n n e )


Exhibit 8: Western Europe HR coil price (US$/tonne)

0

200

400

600

800

1000

1200

1400

F e b - 0 7

M a y - 0 7

A u g - 0 7

N o v - 0 7

F e b - 0 8

M a y - 0 8

A u g - 0 8

N o v - 0 8

F e b - 0 9

M a y - 0 9

A u g - 0 9

N o v - 0 9

F e b - 1 0

M a y - 1 0

( I n U S $ / t o n n e )


International HR coil price is currently in the vicinityof US$ 650/tonne and have corrected from theirrecent high of US$ 715/tonne which was seen dueto raw material cost push and recovery in globaldemand

HR sheet prices have corrected by ~10% in the lasttwo months since April

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Tata Steel (TISCO)


ValuationsAt the CMP of Rs 484, the stock trades at consolidated FY11E PE of 7.9xand FY11E EV/EBITDA of 5.3x. Factoring in the better-than-expectedperformance and improved outlook we value the company at 5.5xconsolidated FY12E EV/EBITDA to arrive at a revised target of Rs 517 forthe stock. We expect an improvement in consolidated earnings for thecompany going forward on the back of higher sales volumes, variousoperational costs saving measures and product price increasecompensating for raw material cost inflation. We change our stance onthe stock and assign it an ADD rating.

Exhibit 10: EV/EBITDA Valuation(Rs Crore) FY12ETata Steel Cons EBITDA 16227.3EV/EBITDA(x) 5.5Cons. EV 89250.4

Total EV 89250.4Total Debt 48196.4Cash 5654.8Minority Interest 884.1Market Cap 45824.75No. of Shares (Cr) 88.7

Fair Value (Rs) 516.8 Source: Company, ICICIdirect.com Research

Exhibit 11: Global steel valuations

2010 2011 2010 2011 2010 2011Arcelor Mittal 11.8 6.9 0.7 0.6 6.4 4.7US Steel 21.9 7.4 1.4 1.2 6.2 3.8Nucor 27.2 11.9 1.8 1.6 9.2 5.6Severstal 10.8 7.6 1.1 0.9 5.8 4.5Gerdau 28.6 12.5 1.6 1.4 11.4 7.3JFE Holdings 8.6 7.4 1.0 0.9 5.6 5.4Nippon 10.8 8.9 1.0 0.9 6.6 6.0Baoshan 10.4 8.5 1.0 1 5.6 4.8Angang Steel 11.8 9.7 1.0 0.9 6.4 5.3Average 9.0 1.2 1.0 7.0 5.3

EV/EBITDAP/BVCompany

P/E


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Tata Steel (TISCO)


ICICIdirect.com coverage universe (Metals & Mining)

Adhunik Metaliks Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code ADHMET CMP (Rs) 107.5 FY09 1270.3 5.1 21.0 10.2 13.3 9.1

Target (Rs) 134.0 FY10 1449.7 11.1 9.7 6.2 17.5 14.1MCap (Rs Cr) 1327.2 Upside (%) 24.7 FY11E 1725.4 15.5 6.9 5.3 20.1 17.1

FY12E 1873.0 18.9 7.1 4.6 20.0 17.6

JSW Steel Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code JINVIJ CMP (Rs) 1,043.8 FY09 16081.5 14.7 71.0 11.4 3.5 9.3

Target (Rs) 1,192.0 FY10 19073.8 85.4 12.2 9.1 17.8 11.8MCap (Rs Cr) 19523.3 Upside (%) 14.2 FY11E 23904.9 98.5 10.6 7.0 17.5 13.7

FY12E 31780.8 141.9 8.4 5.6 20.3 15.6

Usha Martin Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code USHBEL CMP (Rs) 80.2 FY09 2949.8 6.6 12.2 7.5 14.6 13.9


FY12E 4000.5 13.0 8.1 4.3 20.9 17.8

Visa Steel Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code VISST CMP (Rs) 37.2 FY09 1035.0 -6.1 NA NA NA NA


FY12E 1944.5 15.4 3.4 3.8 29.6 17.8

Tata Steel - Cons Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code TISCO CMP (Rs) 484.2 FY09 145686.3 67.8 7.1 4.3 17.4 15.0

Target (Rs) 517.0 FY10 101757.8 -22.6 -21.5 10.4 -7.1 4.2MCap (Rs Cr) 42934.0 Upside (%) 6.8 FY11E 113915.8 45.7 10.6 6.3 13.0 10.8

FY12E 123045.4 60.8 8.0 5.3 15.2 12.6

SAIL Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code SAIL CMP (Rs) 200.2 FY09 43639.7 14.9 13.4 6.2 32.7 37.4


FY12E 58927.2 21.8 9.2 5.7 19.6 17.3

Sesa Goa Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code SESGOA CMP (Rs) 353.8 FY09 4959.1 25.3 14.0 9.3 42.2 51.9


FY12E 11127.5 57.9 6.1 2.6 26.1 31.4

Hindustan Zinc Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)

Idirect Code HINZIN CMP (Rs) 983.9 FY09 5680.3 64.6 15.2 11.1 20.8 19.8Target (Rs) 1,312.0 FY10 8017.0 95.6 10.3 6.4 24.7 27.2

MCap (Rs Cr) 41572.7 Upside (%) 33.3 FY11E 9322.1 110.3 8.9 4.8 22.6 25.1FY12E 11261.4 137.7 7.1 3.0 22.8 25.7

Sterlite Indsutries Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code STEIND CMP (Rs) 652.9 FY09 21144.2 50.0 13.1 6.2 14.8 16.4


FY12E 40235.5 100.7 6.5 1.9 18.9 20.2

GPIL Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)Idirect Code GODPOW CMP (Rs) 207.0 FY09 1092.0 22.8 9.1 6.6 14.6 13.6

Target (Rs) 254.0 FY10E 799.3 17.9 11.5 7.0 10.2 10.6MCap (Rs Cr) 557.6 Upside (%) 22.7 FY11E 967.1 36.9 5.6 3.9 18.4 17.6

FY12E 1010.2 42.5 4.9 3.0 17.9 17.3Source: Company, ICICIdirect.com Research

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Tata Steel (TISCO)

ICICIdirect.com | Equity Research P 8

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Pankaj Pandey Head – Research [email protected] m

ICICIdirect.com Research Desk,ICICI Securities Limited,

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