Hold Tata Steel; target of Rs 420: KRChoksey

KRChoksey has recommended hold rating on Tata Steel with a target of Rs 420, in its August 16, 2012 research report.

“Tata Steel reported another disappointing result in Q1FY13, which was below our expectations. Top-line grew marginally by 2% y-o-y; however declined by 1% on a sequential basis. EBITDA declined significantly on y-o-y basis, due to higher operating expenditure during the quarter. Net profit plunged to Rs598cr (a decline of 89% y–o-y), attributed to a higher interest expense and effective tax rate over the same period. Slowdown in Europe and sluggish demand of steel due to lack of infra and construction spending impacted the overall performance.”

“Sales remained marginally higher at Rs 33,821cr in Q1FY13, primarily due to decline in sales volume by 9% y-o-y, fully offset by 12% y-o-y increase in realization. EBITDA declined 24% y-o-y, reflecting higher staff costs and other expenditure, partially offset by decline in raw material cost, led to increase in total operating expenses. Consequently, EBITDA margin declined by 340bps in Q1FY13. Tata Steel posted a net profit of Rs598cr in Q1FY13 v/s Rs 5,347cr in Q1FY12, owing to a higher depreciation, interest expense and tax burden. Last year, it had a massive one-off income of Rs3362cr (Sale of stakes in Riversdale Mining and Tata Refractories). TSL India produced 1.74 MT in Q1FY13 v/s 1.75 MT in Q1FY12 & 1.77 MT in Q4FY12. Deliveries were 1.59 MT in Q1FY13 V/S 1.59 MT in Q1FY12 & 1.77MT in Q4FY12. Net steel realization increased by 12% y-o-y to Rs51,433/Tonne, led to increase in sales by 13% y-o-y to Rs 8,908cr against Rs 7,860cr in Q1FY12. However, EBITDA declined by 11% y-o-y to Rs2,780cr v/s Rs3,115cr in Q1FY12, due to higher raw material cost, staff expenses & other expenditures.”

“Another disappointing quarter led by sluggish performance from European operations on the back of recent euro crises is keeping our view subdued. There has been contraction of steel demand due to slowdown in construction & industrial activities. However, we believe domestic operation to perform better with the anticipation of aggressive policy stance on infra and construction spending, clearance of projects which will keep the steel demand intact over the long term. Therefore, we maintain our HOLD rating with a target price of Rs 420/Share (on SOTP based), an upside of 5% from current levels,” says KRChoksey research report.

Shares held by Mutual Funds/UTI

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