>TATA STEEL LIMITED (DEUTSCHE BANK)

Is valuation catch up sustainable?

■ Cutting estimates on global steel price forecast cut
We are cutting our FY10 and FY11 EPS estimates by 48% and 13%, respectively, following downward revisions to DB's global steel price forecasts. We have seen a sharp expansion in steel equity valuations across world geographies recently on expectations of restocking. Following the expansion in global valuation multiples for steel equities, we are raising TP for Tata Steel to INR410 but believe the valuation expansion might not sustain if we do not see more solid indicators of steel demand recovery, particularly in Europe. Maintain Hold.

■ Debt covenant reset reduces balance sheet related risks…
Tata Steel has reached agreement with its lenders to reset the covenants on its Corus acquisition related senior debt facility. As per the agreement, testing of Corus’s earnings related covenants will be suspended till Mar’10 without any increase in the current interest costs. We believe that the reset is a strong positive for the company because it eliminates the risk of refinancing compulsions.

■ .. but earnings recovery still elusive at Corus
Last year, the global liquidity crisis had forced investor attention on Tata Steel to shift from income statement to balance sheet. We believe that though the covenant reset now sharply reduces balance sheet risks, income statement risks will continue to dominate investor mindsets until the European steel industry shows signs of a sustainable rebound.

■ TP raised to INR410/share; Maintain Hold
Our TP of INR410 is based on a SOTP valuation - Indian operations valued at FY10E EV/EBITDA of 6.4x, UK ops valued at FY10E EV/EBITDA of 5.1x, Asia ops valued at FY10E EV/EBITDA of 2x. Our target price translates into a blended FY10E EV/EBITDA multiple of 5.7x. Upside risks include: tariff barriers in Europe, downside risks include: protracted steel down cycle.

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