>TATA STEEL: Disappointing to the core, maintain sell

Tata Steel reported more-than-expected consolidated PAT loss of ~Rs6bn (our est. loss Rs3.1bn) on account of Rs7.8bn operational loss in European operations due to high raw material costs. EBITDA stood at Rs17.2bn (margin of 5.2%, lowest in two years) as European operations suffered larger-than expected EBITDA loss of ~US$46/tonne and domestic operations remained under pressure as expected due to cost pressures. We expect profitability to improve going forward on account of lower raw material costs but see concerns related to European operations continuing as further restructuring and asset closure announcements will result in restructuring costs hitting P&L ahead. We revise our estimates slightly lower and remain well below consensus with our continued negative stance on the European operations, lower margin profile in domestic operations on reduced backward integration post expansion and high interest costs on account of the huge debt pile. Maintain Sell.


■ Standalone results remain lower as expected: Domestic sales volume stood at ~1.62MT (our est. ~1.7 MT) and higher costs resulted in EBITDA margin of 31.7%, a drop of 230 bps sequentially. Long product sales were lower by 7% QoQ due to planned shutdowns but realizations were higher due to better product mix. 2.9mtpa steel expansion remains on track, but commissioning is yet to begin and is expected to take longer time for stabilisation with ~1MT volume contribution in FY13E.


■  Corus suffers higher loss, leads to consolidated EBITDA plunge: Corus suffered EBITDA loss of ~US$46/tonne as realizations dropped 7% QoQ and raw material costs climbed as expected. Restructuring of operations continues at Corus and Llanwern hot strip mill was closed in Dec’11 after cuts in long product capacity was implemented in Sep-Oct’11. South-East Asian subsidiaries continued their subdued performance and reported EBITDA loss of ~US$3/tonne on account of ~15% drop in sales volumes to 0.66 MT. As a result of operational losses in subsidiaries, cons. EBITDA plunged to Rs17.2bn with a two-year low margin of 5.2%.


■ Outlook on Europe earnings cloudy: We see outlook on European operations remaining cloudy and expect EBITDA loss to continue in Q4FY12. We expect normalized EBITDA/tonne of US$25/35 in FY13E/14E in Corus as raw material cost pressures are easing but demand remains lackluster. We also expect restructuring costs at Corus to hit P&L in the next few quarters on account of ~2500 job losses, keeping profitability subdued. We expect domestic sales volume of 8MT/9.2MT in FY13E/14E. We expect EBITDA margin of 32.2%/33.1% in FY13E/14E on a standalone basis as integration on the coking coal front would drop post expansion and product mix will get skewed towards flats, keeping overall realizations in check. We revise our cons. EBITDA estimates lower by 4.7%/0.2% for FY13E/14E


■ Maintain sell: We remain skeptical on subsidiary earnings going forward and are equally concerned on elevated maintenance capex keeping the debt levels high. We shift our valuation base to FY14E and value the company on SOTP basis with domestic operations at 5.5x FY14E EV/EBITDA and Corus & South-east Asian subsidiaries at 4x FY14E EV/EBITDA to arrive at a target price of Rs391. Maintain Sell.


RISH TRADER