Motilal Oswal neutral on Tata Steel

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Motilal Oswal neutral on Tata Steel

Motilal Oswal has maintained neutral rating on Tata Steel with a target of Rs 508, in its February 10, 2012 research report.

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Motilal Oswal has maintained neutral rating on Tata Steel with a target of Rs 508, in its February 10, 2012 research report.

"Tata Steel went into red again after two years. For 3QFY12, it reported consolidated after tax loss of INR6b. Consolidated EBITDA declined 41% QoQ to INR17.2b, as Tata Steel Europe (TSE) margins turned negative. EBITDA/ton for TSE was a negative USD44. The Indian operations, however, posted EBITDA of INR26.3b. EBITDA losses in subsidiaries other than TSE shrank by INR3.7b QoQ to INR1.7b. Operating, power and freight costs persist for the Indian business. Group volumes declined 4% QoQ to 5.8m tons and realization declined 6% to USD1,116/ton. Volumes in India were 2% lower at 1.62m tons; the volume decline in subsidiaries was sharper at 5% due to weaker demand in Europe."

"We expect margins to expand in 4QFY12 due to increase in steel prices in January and cost reduction on account of lower raw material prices. For FY13, we are cutting our steel sales volume estimate for Indian operations by 0.6m tons to 7.6m tons, as the management has cut its guidance of incremental volumes from the 3mtpa expansion at Jamshedpur to just 1m tons. We are cutting our EBITDA per ton estimate by USD4 to USD40 for all subsidiaries and by USD9 to USD279 for Indian operations. As a result, our EPS estimate for FY13 is cut by 19% to INR44.4. The recession in Europe and volatile steel prices will continue to adversely impact TSE. Though TSE has undertaken a number of restructuring initiatives from time to time, these appear insufficient in view of the considerable volatility in steel prices. Since Tata Steel's earnings are highly sensitive to steel prices and we have a cautious view on the steel sector, we downgrade the stock to Neutral," says Motilal Oswal research report.

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To read the full report click on the attachment