Sell Tata Steel; target of Rs 230: Motilal Oswal

Motilal Oswal is bearish on Tata Steel and has recommended sell rating on the stock with a target of Rs 230 in its January 7, 2013 research report.
 
“Tata Steel India has recently undergone 2.9mtpa brownfield expansion at Jamshedpur. It is planning 6mtpa greenfield expansion in Odisha in two phases of 3mtpa each. It also has 80% stake in the DSO (Direct shipping ore) project in Canada, with the balance 20% stake owned by New Millennium Iron Corporation (NML). (Tata Steel has 27.4% stake in NML). Cumulatively, the capex of all the three projects is expected to be INR441b. In an optimistic scenario of iron ore prices at USD106/ ton, all the three projects combined will have an NPV of –INR80b, with an IRR of 11.9%. In our base case scenario of iron ore prices at USD83/ton, the combined NPV will decline further to –INR144b, with an IRR of 9.1%. Lower iron ore prices will result in reduced iron ore integration benefits as well as lower realizations for the DSO project.”
 
Applying our two alternative approaches to valuation, we find that Tata Steel (TATA) has downside in 3 of the 4 situations. We maintain our Sell recommendation.
 
SOTP: We have valued operational assets at an EV of 5x one-year forward EBITDA. We have adjusted the CWIP against the NPV of the projects to capture their intrinsic value. TATA’s valuations are highly sensitive to steel/iron ore prices. In the base case scenario, where we assume iron ore prices of USD83/ton, we arrive at a value of INR182/share. In the optimistic scenario, where we assume iron ore prices of USD106/ton FOB, we arrive at a value of INR348/share.
 
FY20 valuations discounted for five years: We arrive at FY20 valuations to factor in completion of all ongoing projects and the possible delays. We have discounted these valuations backwards for five years by TATA’s cost of equity of 18.3%. In the base case scenario, where we assume iron ore prices of USD83/ton, we arrive at a value of INR412/share. In the optimistic scenario, where we assume iron ore prices of USD106/ton, we arrive at a value of INR514/share.

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