Buy Tata Sponge Iron; target of Rs 413: IIFL

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IIFL is bullish on Tata Sponge Iron and has recommended buy rating on the stock with a target of Rs 413 in its September 8, 2010 research report.

"Tata Sponge Iron has 3 sponge iron kilns of 0.13mtpa each and two waste heat recovery power plants with a combined capacity of 26 MW. Over the last two years, it has sold ~69% (125 million units) of total power produced to the grid. We expect power sales to increase to 128 million units in FY11 and 139 million units in FY12 on the back of higher utilization rates. We expect average power realisations of Rs 3.5 per unit and revenues of Rs 451 million in FY11 and Rs 491 million in FY12. With steady cash flows, we expect cash per share to rise from Rs 60.5 in FY10 to Rs 145 in FY12. With raw material linkages already established, we believe TSIL should post profit CAGR of 11% over FY10-12E."

"At the CMP of Rs 334, the stock is trading at 2x FY12E EV/EBIDTA and at a FY12E P/B of 0.9x, which is at a steep discount to its peers. We expect the stock to move higher in the near term as steel prices have firmed up and valuation gap narrows. We recommend a BUY with a price target of Rs 413," says IIFL research report.

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