Buy Tata Steel; target of Rs 834: Motilal Oswal

“Tata Steel's 4QFY11 adj. consolidated PAT increased 34% QoQ to Rs11.8b, below our estimate of Rs20.1b. Reported consolidated PAT of Rs41.5b included a non-recurring net gain of Rs28.7b (Rs25b gain due to TCP sales, US$133m write back of TCP mothballing and a fire at the Ijmuiden pickling line and GBP90m Scunthorpe restructuring expenses). Though the performance of TSE was in-line with expectation with EBITDA per ton of US$53/t, QoQ margin expansion for Indian business was much below estimates due to rise in operating costs on account of wages, freight and other operating expenses. The Indian operation's steel EBITDA increased 6.7% QoQ to Rs28.4b and EBITDA/ton increased by 3% QoQ to US$372/t (v/s our est.of US$447/t). Staff costs increased to Rs7.6b (v/s our est. of Rs6.2b) due to year-end provisioning for pension etc., which amounted to Rs1.3b. Freight cost and other operating costs also rose.”

“We expect TSE margins to expand in 1QFY12 due to the lag effect of higher steel prices in 4QFY11, while the high cost (US$330/t) coking coal will affect TSE in 2QFY12. Restructuring at TSE (long products) is expected to result in recurring annual value creation of GBP250m, including cost savings of GBP130m. We are cutting FY12 and FY13 EPS by 20% and 17% to Rs66.5 and Rs84.3 respectively to factor in higher-than expected operating costs. We are positive about the stock as Tata Steel is set to deliver growth in the high margin Indian business and expand TSE margins through restructuring, product mix improvement and greater focus on customer services. The stock trades at EV/EBITDA of 6.5x FY12E and 5.3x FY13E. Maintain Buy,” says Motilal Oswal research report.  

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