Monday, December 26, 2011

>TATA STEEL: Jamshedpur expansion remains the key

Domestic demand visibility for upcoming expansion, concerns on Tata Steel Europe’s (TSE) margins, outlook on pension liabilities and incremental cashflow stress dominated investor concerns in our roadshow with Tata Steel’s (TSL) management. Though the stock at current level is drawing investor attention, the management’s cautious guidance on TSE’s H2FY12 margins, volumes and cashflow will lead to a wait and watch strategy. For us, it is the uncertainty over despatches of upcoming HRC capacity which is leading to maximum quantum of value loss. We have cut FY13 contribution from 2.9mtpa Jamshedpur expansion to 0.7mtpa from 1.3mtpa (the management still guides for 1- 1.2mtpa). Further, there are unnecessary concerns on domestic cashflow on the possibility of increased lending requirement, where one overlooks Rs30bn of working capital inflow in TSL in H1FY12. We are revising down our FY12/13 earnings estimates by 37%/19% respectively, we still maintain BUY with a revised target price of Rs482 (Rs590 earlier).

Expansion volumes guided at 1-1.2mnte in FY13: The management maintained the commissioning of Jamshedpur expansion in March 12, pegging the first year volume estimate at 1-1.2mnte. We have revised down our FY13 incremental volume contribution from the expansion to 0.7mtpa from 1.3mtpa, in line with our in-house assessment of HRC demand scenario in India (using a bottom-up approach).

Management’s cautious commentary on TSE’s margins reflects ongoing pricing weakness in Europe. Surprisingly though, the volume guidance is not tracking the margin commentary in Europe. Also, analysis of Ijmuiden’s margins suggests that sub US$20/te scenario in TSE for FY12 looks difficult.

Pension liability continues to reign supreme in investor mind: TSL has clarified that P&L impact for restatement of surplus/deficit is not related to % deficit that can come out of actuarial valuation. Further, the management maintained that cashflow requirements would not be immediate.

Still counting on release of working capital: Management clarified that impact of reducing raw materials as well as working capital release for TSE will be deferred to Q1FY13. We have taken almost flat working capital outflow in TSE in H2FY12 (HoH)

Reducing estimates for domestic operations: We have cut target price from Rs590 to Rs482, ~90% of which is led by revision in the numbers of domestic business. Further, domestic numbers have higher probability of surprising negatively from current levels than TSE’s numbers. Nevertheless, we still see value in the stock. Maintain BUY.