Reduce Tata Steel; target Rs 315: Dolat Capital

Dolat Capital's research report on Tata Steel

"Tata Steel reported a 2.5 percentQoQ drop in blended steel realizations to Rs 49624 (DCe: Rs 50100) on back of 3.5 percentdrop in realizations in flat product . However EBITDA/mt  was higher at Rs 14500/mt due to significant fall in power and fuel cost by 8.4 percentQoQ and other expenses by 9.6 percent due to lower forex losses. EBITDA at Rs 33.04bn (Dce; Rs 31.81bn) was largely higher due to higher volumes and lower raw material cost. Lower interest cost of Rs 4.59bn (Dce: Rs 5.25bn) and higher other income of Rs 4.74bn due to higher dividend income, (+1229 percentQoQ) led to pre exceptional PBT of Rs 28.5bn (Dce: Rs 27bn). TSI PAT increased by 27.7 percentYoY/90.5 percentQoQ to Rs 19.93bn, despite impairment to the tune of Rs 6.84bn for its South African ferro chrome subsidiary."

"Tata Steel Europe (TSE) EBITDA/mt at USD 33 (DCe:USD 7) due to one off reversals: TSE reported strong volumes of 3.4 mn tonne (DCe:3.2mn tonne) in challenging  environment, as realizations rose by 5.7 percentQoQ to USD 1034/mt. EBITDA/mt improved from loss of USD 15/mt in Q3FY13 to USD 33/mt as it realized the full impact of lower raw material cost and higher realizations during Q4FY13. TSE expects the volumes of ~ 14mn tonne in FY14 as it has completed its relining of Port Talbot BF-4 and expects a improved performance given the cost savings of GBP200mn achieved in last 2 qtrs."

"Strong performance in South East Asia: Tata Steel South East Asia had a strong EBITDA at USD 41mn (+57 percentQoQ,94 percentYoY, DCe:USD24mn) was higher due to better profitability in Natsteel as it divested loss making assets in China and Australia. Tata Steel Thailand also had a turnaround and is now witnessing an increase in demand due to improvement in economic scenario in Thailand."

"Goodwill and assets impaired primarily in long products division: TSE has primarily impaired its goodwill and written down its assets primarily in the long products division and that too substantially in UK given the weak construction outlook in Europe. Tata Steel has written off assets and impaired goodwill in its assets in Europe, Tata Steel Thailand , Tata Metaliks, Tata Steel South Africa as an exceptional items of Rs 83.55bn (1.6bn USD) and has booked gain of Rs 9.43bn on sale of shares of Titan Industries in one of its subsidiaries."

"We believe Tata Steel India performance would drift further downwards from EBITDA per tonne of USD 264 per tonne in Q4Fy13 to USD 250 in FY14 due to fall in steel pricesand have cut our operating earning estimates by 12 percent in FY14E and 3 percent in FY15E.. However we believe Tata Steel performance would be under pressure given the high leverage with Net debt/EBITDA of 4.0X FY2014E and 3.9X FY2015E, continued pressure in European operations, and subdued demand in the  Indian steel market. We have reduced our target multiple from 6x to 5.5x  given the high leverage and roll target price to  FY15. We maintain our reduce rating on the stock Rs 315 (5.5x FY15 EV/EBITDA for Indian operations, 5x for rest of the operations) leaving little room for upside from current levels," says Dolat Capital research report.

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