Hold Tata Sponge Iron; tgt of Rs 364: Asit C. Mehta

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Hold Tata Sponge Iron; tgt of Rs 364: Asit C. Mehta

Asit C. Mehta has recommended hold rating on Tata Sponge Iron (TSIL) with a target of Rs 364, in its January 31, 2011 research report.

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Asit C. Mehta has recommended hold rating on Tata Sponge Iron (TSIL) with a target of Rs 364, in its January 31, 2011 research report.

"Tata Sponge Iron (TSIL) reported revenue growth of 31% to Rs 1,704 million YOY on account of improvement in sponge iron realization. EBITDA Margin declined by 600 bps to 22% YOY due to higher raw material cost. PAT improved by 9% to Rs 222 million YOY."

"TSIL's 31% revenue growth YOY was higher than our estimate, on back of improvement in sponge iron realization. Sponge iron realization increased by 25% to Rs 15,843/tonne YOY. However, during the quarter sponge iron production increased by 8% to 98,641 tonnes YOY. However, the increase in cost of raw material was higher than revenue, resulting EBITDA Margin declining to 22% compared to 28% in Q3FY10. The cost of raw material increased by 51% during the quarter. However, it declined 12% compared to Q2FY11. EBITDA grew by 6% YOY to INR378 million during the quarter. Similarly, PAT grew by 9% to Rs 222 million YOY, whereas PAT margin declined to 13% compared with 16% in Q3FY10."

"TSIL's revenue is expected to grow at 23% and 6% in FY11E and FY12E respectively. High raw material cost would impact the margin in FY11E and FY12E. We expect, EBITDA Margin of 20.1% and 19.6% in FY11E and FY12E respectively. We have revised FY11E and FY12E EPS estimates to Rs 55 and Rs 60.7 respectively. We assign multiple of 6x to FY12E EPS and revise our target price to Rs 364. At CMP of Rs 348, TSIL is trading at PE of 6.3x and 5.7x of FY11E and FY12E earnings respectively. We maintain "HOLD" recommendation on stock with revised price target of Rs 364," says Asit C. Mehta research report.

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To read the full report click on the attachment