>Tata Steel Ltd: Q1FY11 Consolidated earnings preview

• Earnings expectations for both standalone and consolidated: TATA reports
consolidated earnings on 12th August. For standalone business, we expect
EBITDA of Rs25bn (+48% y/y, -14% q/q) v/s Bloomberg Consensus (BBRG)
estimates of Rs24.7bn. Our standalone PAT estimates are Rs13bn (+66% y/y, -
35% q/q) v/s BBRG of Rs13.3bn. For the consolidated results, we expect
EBITDA of Rs46.6bn (-2% q/q) and PAT at Rs20.6bn (-25% q/q) v/s BBRG
EBITDA of Rs43.5bn and PAT at Rs18.04bn.

• Corus expectations: We expect Corus Q1FY11E EBITDA at $480mn with
EBITDA/MT of $117/MT. While we do not have BBRG estimates for the
same, we believe street estimates are slightly lower than ours. Over the past
few quarters Corus earnings have varied very significantly from ours and
street estimates with Dec-09 and March-10 quarter Corus earnings
significantly above everyone’s estimates while June-09 and Sept-09 were
significantly below estimates. We do admit that even for this quarter (while we
are back to steady state business), given the various moving parts and lack data,
Corus earnings may be significantly below/above our and street estimates.
Corus reported EBITDA/MT of $94/MT in the March-10 quarter with ASP of
$976/MT. Since then, while Corus should see higher iron ore costs (as the new
contracts come into place), coking coal should be on the older and lower priced
contracts. German spot HRC prices have increased by nearly $200/MT in
the Feb-May-10 period. We do not expect Corus ASP to increase $200/MT
q/q, but are building in $74/MT ASP increase q/q and $51/MT cost
increase, and hence our $23/MT EBITDA/MT increase q/q to $117/MT.

• 3 key variables we would like more clarity on are: a) Given Arcelor’s (MT)
comments that costs would continue to increase into the Dec quarter and 10%
increase in steel prices would be required to maintain EBITDA, we would like
more clarity on Corus’s cost trajectory over next 2 quarters; b) What kind of
capacity utilizations the company expects over FY11E, and c) details on the
potential re-financing of the Corus debt and would it possibly include any
further equity issue (TATA had issued stock to promoters, in May).

• Pension assets could likely decline further from March-10 closing levels:
Longer term we continue to believe the pension issue is among the most
important variables for TATA Corus as historically healthcare inflation has been
ahead of asset returns Given that equity markets had come off sharply in the
June quarter, we expect the pension surplus assets to decline further from the
reported number of $217mn. While the current rally in equity markets should
result in pension surplus assets moving up in the Sep quarter, the net surplus has
declined from a peak of $2.1bn as of Mar-08 to $0.2bn in Mar-10 end.

• While we continue to believe that the worst is behind for Corus and unit should
be profitable (operating level) into FY11E, visibility on profitability levels
remains low.

To read the full report: TISCO