>TATA STEEL (MACQUARIE RESEARCH)

Raising money?

Event
■ GDR issue could be in offing: Media reports suggest that Tata Steel might be looking to do a GDR offering. The amount indicated is a wide range of US$500m to US$1.5bn. We estimate that Tata Steel needs some equity funding, and with the business environment improving, the likelihood of better valuation is high, in our view.

Impact
■ Was a part of Corus acquisition funding plan: Tata Steel, post the acquisition of Corus in its funding plan, had mentioned about US$500m of GDR issue. However, given the buoyancy in the steel market, this was left out at that time and now seems to have been revisited.

■ Requirement – well funded but a bit stretched: Based on our estimates, Tata Steel should have free cashflow of US$1.5bn in FY10. This compares well with the estimated capex of US$1bn. However, with net debt to equity at 1.8x, the balance sheet is a bit stretched, hurting the company’s ability to undertake even profitable expansions.

■ Pricing and impact– expect upward of Rs500/sh: Tata Steel has done allequity infusion since 2006 at Rs450-500/sh, and we estimate that diluting below this level is only possible by a rights issue. We believe that, if Tata Steel raises US$500m at Rs500/sh, EPS would go up marginally in FY10, although there would be 2.7% dilution in FY11. If the raised amount is US$1.5bn, the EPS dilution would be 7.3% in FY11, by our estimate.

■ Business fundamentals improving: According to trade reports, the European steel mills have so far been successful in pushing though €30 (US$42/t) price increases for hot-rolled coil from July 1. Thyssen Krupp (TKA GR, €17.04, NR) reported that it has pushed through price increases on annual and quarterly contracts for steel. Tata Steel has announced the starting of the sixth Blast Furnace at its Netherland unit.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs584.00 based on a PER methodology.
■ Catalyst: Improving steel demand and pricing scenario in Europe.

Action and recommendation
■ Maintain Outperform: We think Tata Steel reached the bottom of its earnings cycle, and we expect a sharp recovery from 2Q FY10. We believe that the company is not only the best stock to play the rebound but also that it has enough catalysts in the medium term to merit a long-term investment. Reduced concern on its debt could lead to re-rating of the stock, in our view.

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