Hold Tata Steel; target of Rs 422: Emkay

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Hold Tata Steel; target of Rs 422: Emkay

Emkay Global Financial Services has recommended hold rating on Tata Steel with a target of Rs 422, in its February 10, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on Tata Steel with a target of Rs 422, in its February 10, 2012 research report.

"Tata Steel, worries on the European operation continues as the company reported an BEITDA loss of US$147 mn for the quarter implying an EBITDA/ tonne loss of US$44 against EBITDA profit of US$30/ tonne in Q2FY12. Volume however came better than our expectations (of 3.2 mt) at 3.35 mt in Europe. Realizations dropped sequentially by ~US$45/ tonne in Europe on lower demand. The company has reported an inventory (both RM and finished goods) write down of Rs 7.42, which we believe should be treated as operational expenditure only. Though, there has been some improvement in steel prices over past quarters, we believe the situation in Europe is still uncertain and demand growth would be very minimal. On RM costs, some benefit should be expected to be flowing in FY13 mainly on account of coking coal, however, lower CoP might pull down the steel prices, maintaining pressure on the margins. We estimate FY12 and FY13 volume at 13.8 mt and 14 mt respectively with FY13 EBITDA/ tonne at US$45."

"Standalone operation in India continued its steady performance with as EBITDA/ tonne stood at Rs16218 or US$318, slightly better than our estimates of US$305. This can be attributed to better realizations of Rs 47340/ tonne for the steel business. The performance could have been better without higher cost of Rs 3- 4 bn on account of higher coking coal (adjusted for forex) and limestone. We believe, the Indian operation to continue performing steadily going ahead. We estimate a sustainable EBITDA/ tonne of ~US$350 for FY13. On the volume front however the management has guided only 1 mt incremental sales volume from its upcoming 2.9 mtpa brown-field expansion at Jamshedpur (to be commissioned in end Q4FY13). This is lower than estimates and as a result we cut our FY13 volume estimates to 7.615 mt."

"At the CMP of Rs 475, the stock is trading at 6.6x its FY13EPS and 5.4x FY13 EV/ EBITDA. The stock has recently run- up very sharply factoring in improvement in steel prices and in anticipation of lower costs going forward. We feel it would be too early to predict that, as situation in Europe continues to remain uncertain, which can cause huge earning volatility. This along with lower domestic sales volume estimates we cut our FY12 and FY12 EPS to Rs 57 and Rs 69 respectively. Continue to value the domestic operation at 6x EV/ EBITDA and overseas subsidiaries at 4x EV/ EBITDA. We revise our target price to Rs 422/ share. Recommend HOLD," says Emkay Global Financial Services research report.   

Non-Institutions holding more than 90% in Indian cos

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