>TATA STEEL LIMITED (ANTIQUE)

C(h)orus getting stronger

Corus turnaround in 2HFY10
Utilization rates at Corus has picked up from 53% in 1QFY10 to >65% in 2Q driven by restocking demand. Improving economic conditions and seasonal factors will enable Corus to achieve ~80% utilization rates in 4QFY10. Increased fixed cost recovery due to improving utilization and beneficial impact of sliding raw material cost is expected to boost gross contribution by ~USD150/t from 3QFY10 onwards. Realisations in Europe have increased by USD60-70/t in the past few weeks and would positively impact EBIDTA in 3QFY10 onwards.

Its Teesside Cast Products (TCP) facility, though operating at low is breaking even at current slab prices. However, the viability of this facility is still questionable in current environment.

Expansion at domestic operations on track
Tata Steel India (TSI) 2.9mt expansion plan is on track to be commissioned in 2010, and would aid earnings expansion in coming years. Its EBITDA/t of USD258/t for 1QFY10, is expected to improve by USD20-25/t over the next two quarters, as benefits of low cost coking coal flow in. Performance will also be positively impacted from the ferro alloys division due to the sharp uptick in realisations.

Valuation
Strong cost savings initiatives and bouyant steel outlook in Europe should trigger gradual earnings improvement at Corus and should impact earnings positively from 3Q onwards. Efforts are on to generate USD75-100/t of EBITDA at Corus even in a depressed price regime. This, along with strong domestic earnings aided by increase in scale and upsurge in ferro alloys realisations make for a strong case for earnings expansion over the next two years. We thus have revised our target price to INR551 (from earlier INR501), and recommend a BUY.

To see full report: TATA STEEL LIMITED