>TATA STEEL (EDELWEISS)

Results disappoint; Corus realisations surprise positively

■ Q1FY10 performance below expectations
Tata Steel’s Q1FY10 consolidated performance came in below expectations with no benefit of a partial reduction in operating costs and higher-than-expected interest and depreciation costs at Corus. Consolidated EBITDA/tonne stood at ~USD (1) as loss at Corus of USD 117/tonne set off positive EBITDA of USD 252/tonne of the Indian operations. Full year cost savings under the “Weathering the Storm” initiative are pegged at ~USD 1.2 bn, of which, USD 460 mn was achieved in Q1FY10; overall, USD 350-375 mn is recurring.

■ Corus realisation came as positive surprise
Consolidated revenues dipped 11.9% Q-o-Q, primarily led by decline in volumes in India and Corus (19.1% Q-o-Q and 5.7% Q-o-Q) and sharp dip in prices for Nat Steel. Corus realisations came in as a positive surprise at USD 963/tonne, down only 11.8% Y-o-Y (Europe HRC prices are down over 50% Y-o-Y).

■ Raw material cost to be lower from Q3FY10
The company guided that hard coking coal FOB cost for Q2FY10 will continue to be largely at USD 300/tonne and new cost is expected in full effect in Q3FY10. Full impact of reduction in staff cost of GBP 200 mn is expected in FY11.

■ Outlook and valuations: Recovery underway; maintain ‘BUY’
Q2FY10 has seen spot HRC prices increase by USD 40-60/tonne in Europe. Corus’ capacity utilisation has increased from 53% in Q1FY10 to 70% currently, based on new orders. We increase our FY10 estimates for Corus’ average realisations to USD 918/tonne from USD 694/tonne earlier, which is lower than Q1FY10 actual of USD 963/tonne. Our FY10 realisation assumption factors in potential deterioration in product mix (as production ramps up) and any pressure of imports into Europe.

However, the slower-than-anticipated decline in raw material costs and higher below-EBITDA costs in FY10 largely negate the aforementioned upside. We cut our FY10 core EPS by 8.1%, to INR 36.8, and our FY11 core EPS estimate by 6.2%, to INR 83.7 (core EPS is excluding restructuring charges). We maintain our fair value of INR 561/share, based on conservative FY11E EV/EBITDA multiples (6.0x for India operations and 4.0x for Corus). We maintain our ‘BUY’/‘Sector Outperformer’ recommendation on the stock.

To see full report: TATA STEEL