Saturday, August 18, 2012


Tough times ahead, maintain sell

Tata Steel reported consolidated PAT of ~Rs5.98bn (our est. Rs5.4bn) on account of better than expected operational performance in Europe with EBITDA/tonne of ~US$36. Consolidated EBITDA stood at Rs34bn (margin of 10.1%, up by 70 bps QoQ) as European operations saw higher EBITDA on sequential increase in realizations but domestic operations continued to see higher operational costs resulting in standalone EBITDA margin of 31.5%. We expect sequential fall in realizations and expect overall profitability to remain under pressure going forward. We revise our estimates lower marginally 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 large debt pile. We maintain sell with a revised lower target price of Rs366.
■ Standalone results remain subdued due to higher costs: Domestic sales volume stood at ~1.6MT (affected by power outages at plant) and higher wage and power costs resulted in EBITDA margin of 31.5%, a decline of 40bps sequentially despite improvement in realizations. Long product sales saw a drop of ~11% QoQ due to shutdown in May following power outages and flat product sales also remained subdued.

■ Corus reports higher EBITDA, but pressure seen ahead: Corus reported higher-than expected EBITDA/tonne of ~US$36 (our exp of US$15) as realizations improved by ~5% QoQ. This came as a surprise in a tough market and was mainly due to volume sacrifice (lower by 9% QoQ at 3.2MT), better product mix and lag effect of fall in realizations on contract sales. We see a sharp fall in blended realizations going forward for European operations along with continued pressure on volumes and expect lower profitability ahead. South-East Asian subsidiaries delivered stable operational performance QoQ and reported EBITDA of ~US$24/tonne on account of stable volumes and realizations. As a result of better operational performance in subsidiaries, cons. EBITDA stood at ~Rs34bn with a margin of 10.1%.

■ Conference call highlights and outlook: The 2.9mtpa steel expansion has achieved stabilization of the blast furnace but would contribute to incremental volume of ~1MT only in H2FY13 post commissioning of the coke oven and the company targets to exit FY13E near full capacity. Volumes in Europe will remain under pressure due to low demand and holiday season ahead but management expects to maintain flat volumes for FY13E. Steel prices are under pressure in all markets and are expected to be lower sequentially going ahead. Outstanding gross debt increased to ~US$11.7bn due to incremental debt funding.

■ Capex guidance for FY13E was maintained at US$2.2-2.3bn. We revise our volume estimates lower for European operations to 13 MT of sales volume with EBITDA/tonne of US$25 in FY13E. We expect EBITDA margin of 30.9%/31.3% 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 consolidated EBITDA estimates lower by 3.3%/2.2% for FY13E/14E.

■ Maintain sell: We 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 Rs366. Maintain sell.