Buy Tata Steel; target of Rs 530: IIFL

“Over the years, Tata Steel’s domestic operations have exhibited robust performance on the back of high raw material integration and superior product mix. Domestic steel product prices have increased by Rs1,500- 2,000/ton over the last three months. This coupled with a decline in coking coal costs and higher volumes would lead to margin expansion in Q4 FY12. The 2.9mtpa expansion is likely to be commissioned in April ’12 and would require some time to stabilize and integrate the whole complex. We expect the new capacity to contribute additional 1mn tons of saleable steel each over the next two years. Stable steel prices, superior product mix coupled with lower coking coal prices yoy would lead to higher EBIDTA/ton in FY13. Standalone operation is expected to witness an EBIDTA CAGR of 20.6% over FY12-14. This would generate Rs162bn of operating cash flow over the same period, funding major part of the capex for its Odisha project.”

“Steel spot prices in Europe have recovered US$70-80/ton since January. However, this would impact Tata Steel’s realisations only from March ’12, as any change in spot prices impacts Tata Steel’s realisation with a lag. We expect realisations to increase by US$25/ton qoq in Q4 FY12. With an uptick in steel prices and a decline in raw material costs (both iron ore and coking coal), we believe the company would post positive EBIDTA in Q4 FY12. However, the performance would be restricted by one-offs like impairment charges and restructuring costs. On the back of various restructuring process, revival in European demand and higher steel prices yoy, we expect EBIDTA/ton to increase to US$50/ton in FY14.”

“We believe domestic operations would continue to be the earnings driver for Tata Steel over the next two years. Even though near term earnings in Corus would remain under pressure due to one-off items, we expect Corus to deliver steady EBIDTA/ton over FY13-14. We expect Tata Steel to report strong earnings over the next two years due to 1) impact of new 2.9mtpa capacity 2) impact of restructuring exercise in Europe 3) benefits from overseas raw material projects. After the recent correction in the stock over the last six months, Tata Steel is trading at a discount to its peers. We value the company on a SOTP basis and maintain our Buy rating with a revised nine-month price target of Rs 530,” says IIFL research report. 

Public holding more than 90% in Indian cos

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