>TATA STEEL LIMITED (ICICI SECURITIES)

Tata Steel (TSL) has entered into a joint venture (JV) with New Millennium Capital (NML) and Labmag for developing direct shipping ore (DSO) project in Canada. A JV formation (hence profit participation) from an earlier scheduled SPV reflects increased visibility of mines to start operations. TSL has become NML’s largest shareholder with 19.9% stake. Upon completion of a feasibility study by NML for its DSO project, TSL has 180 days to acquire 80% equity in the project. Thereafter, the company is required to fund 100% of the project cost up to US$300mn. The mines have ~100mnte reserves, with 4mnte annualised production tailored to meet Corus’ requirements. Logistics infrastructure concerns could lead to delay in shipments versus management guidance of Q2CY11. Maintain BUY.

■ Reserves and resources. The DSO project contains 52.5mnte of proven and probable mineral reserves (~58.9% Fe), 3.5mnte measured and indicated mineral resources (~59% Fe), 5.8mnte of inferred resources (~55.8% Fe) and ~40mnte of historical resources that are not currently in compliance with NI 43-101.

■ Catered for Corus offtake. NML will produce sinter fines (SF) and pellet fines (PF), as per Corus’ requirements. SF will have minimum 64.5% Fe, with size less than 6mm (maximum 15% of 0.15mm). PF will form 10-15% of the production, with minimum 64.5% Fe and 0.075mm size. The fines are developed exclusively to meet Corus’ requirements (market price offtake).

Mining witnesses a spur

■ Cost profile – Comparison with Iron Ore Company of Canada. The management has guided for US$35/te FOB mining cost from DSO operations. We have compared DSO with Iron Ore Company of Canada (IOC). IOC sells ~77% of total iron ore as pellets, which dipped to 57% in H1CY09 due to reduced profitability. The average operational cost for IOC (past three years) is at US$50/te. With 43% concentrate production, costs have gone down to US$44/te in H1CY09. But NML will be exposed to higher logistics costs as IOC controls its own railway lines.

■ Logistics hangover could delay proceedings. Carriage of ore from Kivivic (section 4) and Timmings (sections 2 & 3) to ships-hold at Point Noire would involve three intermediate railways: i) Tshiuetin Railway (TSH) ─ 250Kms from Timmings to Emeril/Ross Bay Junction & owned by Naskapi Nation of Kawachikamach, ii) Quebec North Shore & Labrador Railway (QNS&L) ─ 350Kms from Emeril/Ross Bay junction to Arnaud sliding & owned by IOC and iii) Arnaud Railway ─ 30Kms long from Arnaud sliding to ships hold at Pointe Noire & owned by Wabush Mines. While resolution of TSH tariff was expected in Q3CY09, tariff proposals for other two lines were to be submitted in Q3CY09. In the absence of any company announcements, we presume that the proposals have been delayed.

To read the full report: TATA STEEL

>MARUTI SUZUKI (MOTI;LAL OSWAL)

■ Momentum in volume to continue, with multiple drivers for medium term: Strong volume momentum to continue in November 2009 and December 2009, with volumes to remain stable on MoM basis at 83-85,000 units/ month. Volume growth in November would be driven by inventory filling in November due to plant shutdown in December. Improving availability of car finance with re-entry of ICICI Bank, recovery of demand in urban markets and continuance of strong growth in rural markets would be key drivers for growth in medium term.

■ Upgradation of engines to Euro IV would enable price hikes: Maruti normal changes prices once in a year in January. However, any changes in prices this time would be driven by a) expected roll-back in excise duty, b) increase in RM cost and c) change in emission norms. While price increase for existing Euro IV compliant model might happen as early as January 2010, other models price revision might take place along with engine up-gradation.

■ Cost inflation to restrict margin expansion: While Maruti is still negotiating RM contracts for steel and other commodities, it would be forced to give some price hikes for commodities as prices have recovered by 30-60% from the bottom levels of 4QFY09. Our interaction with Apollo Tyres indicated that it is in advanced stages of negotiating 10-12% price hike from car OEMs. With significant exposure to forex (Yen imports of 27% of sales and Euro/USD exports of 15% of sales), unhedged forex exposure poses risk to profitability, especially for FY11 where it is totally unhedged.

■ De-bottlenecking capacity by realigning product mix at both the plants: It is shifting production of Swift Petrol to Gurgaon from Manesar by Dec-09, thereby freeing up ~40,000 units/year capacity at Manesar and utilizing some idle capacity at Gurgaon. This would free-up capacity for fast selling models like Swift Diesel, DZire, A-Star and SX4. However, it is yet to decide on brownfield expansion.

■ Upgrading earnings, maintain Buy: We are upgrading our earnings estimates for FY10 and FY11, by 3.9% (to Rs76.8) and 3.5% (to Rs85.5) respectively, driven by volume upgrades and export realization upgrades in FY11. The stock is valued at 17.3x FY11E EPS and 12.6x FY11E CEPS. Adverse forex movement and pick-up in non-Euro exports are key risks to our estimates. Maintain Buy with target price of Rs1,650 (~14x FY11E Cash EPS).

To read the full report: MARUTI SUZUKI

>BHUSHAN STEEL (MOTILAL OSWAL)

■ HSM close to commissioning; blast furnace 6-8 months away: Bhushan Steel is close to commissioning a 1.9mtpa HSM. Cold trials of the mill have begun. However, the commissioning of a 1.2mtpa blast furnace and coke oven has been delayed by a further 6-8 months. The slab caster and steel melt shop will be initially fed by steel scrap and sponge iron. The company increased its sponge iron capacity by 50% to 1mtpa in 1HFY10 after it commissioned two kilns. The company will further enhance its sponge iron capacity by 340,000tpa by March 2010; and after it completes building its blast furnace and coke oven in 6-8 months its sponge iron/hot metal capacity will rise to 2.5mtpa, paving the way for crude steel capacity of 2.2mtpa.

■ Foray into ERW pipe business – forward integration: With a capex of Rs12b, Bhushan Steel is setting up a 500,000tpa large diameter (4” to 25”) ERW pipe mill. The project is expected to be complete by October 2011. It will increase captive consumption of HRC and reduce the surplus available for commercial sale.

■ Raw material integration to rise significantly in 3-4 years: Bhushan Steel has got an allotment of one iron ore mine, two thermal coal blocks and one coking coal block in Orissa and West Bengal. It has also acquired majority stake in Bowen Energy, which has several coking coal tenements in Australia. Consequently, raw material integration is likely to improve significantly.

■ Capex intensity will keep debt high; cash flows to improve: Total debt increased from Rs81b in March 2009 to Rs95b in September 2009. Phase III expansions to increase the HRC capacity to 5mtpa by the end of FY13, captive mining and other forward integration projects will require capex of Rs25b a year. Therefore, absolute debt levels are likely to rise, though debt/equity ratio will decline from 3.3x in March 2009 to 2x by March 2012 because of increased internal cash flows.

To read the full report: BHUSHAN STEEL

>‘Exit’ Strategy: The Road Ahead (MORGAN STANLEY)

• AXJ industrial production (IP) growth has recovered close to trend line: AXJ IP growth is back to the trend line of 9% YoY in September, compared with a decline of 12.4% in the EU and 6.1% in the US for the same month. This acceleration has so far has been largely driven by domestic demand, but exports are also beginning to recover.

• Policy support withdrawal to remain gradual: We cite three reasons: a) recovery so far been largely policy-induced and quick reversal in stimulus would risk a double-dip in growth; b) although exports are recovering, they are still far away from pre-crisis levels; c) AXJ core inflation remains low below Central Banks’ comfort zone.

• Monetary policy ‘Exit’ to begin from 1Q2010: We expect India and Korea to start lifting policy rates from Jan-2010. Currently, the short-term real interest rate on core inflation in the region is very low at an average of 1.6% even as the industrial production has accelerated to 9.1%. We expect the weighted average policy rate in the region to rise to 5.8% by end-Dec11, from 4.6% as of end-Dec09. We see this as a trend towards normalization of rates.

• Except for China, most countries in AXJ should begin reversal in fiscal stimulus soon: Tax and other incentives have already resulted in a sharp rebound in auto and property transactions in the region. We believe that taxation-related stimulus measures that were announced for a limited period may not be renewed or extended. We expect a further rise in China’s fiscal deficit, but the rest of AXJ is likely to start unwinding fiscal stimulus in 2010.

To read the full report: ASIA PACIFIC ECONOMICS