Buy Tata Steel; target of Rs 380: AnandRathi

AnandRathi`s research report on Tata Steel

“Tata Steel’s revenues grew 1.9 percent yoy to Rs321bn, driven by volumes at the Indian operations and stable realizations. EBITDA increased 37.4 percent yoy due to sharp positive swing at European operations, improved profitability domestically, and lower losses in forex and at minor subsidiaries like Dhamra Port, South Africa Ferro Alloy unit. Looking at sectoral trends, demand conditions in India will reflect weakness in steel volumes. Nevertheless, Tata Steel is best placed among peers due to its marketing network and brand loyalty. Further, it has highest visibility in the sector for project commissioning and volumes growth. We maintain Buy with target price of Rs380.”

“India volume maintained its upward trajectory with 12.7 percent yoy growth due to capacity ramp up. Realisation drop of 12 percent yoy was driven by weaker demand conditions, but was offset by operating leverage and lower other expenses leading to EBITDA/tn of US$268. Profitability will improve further with supporting infrastructure in place (coke oven batteries commissioned in Dec 2012). Kalinganagar project is on track to commission from Oct 2014. European drag likely to decrease. European revenues were hit by 9.9 percent yoy lower volumes and realizations, but EBITDA/tn improved strongly to US$33. Restructuring since FY12, simplification of JV footprint and efficiency investments have reduced controllable costs by GBP200mn. Port Talbort facility will contribute higher volumes, which together with better European market this year and inventory stocking cycle, will improve profitability.”

“At CMP, Tata Steel is trading at 6.4x EV/EBITDA FY14e. We value Tata Steel on SOTP with premium multiple for India, while European operations are valued at discount to factor in low-margin operations,” says AnandRathi research report.  

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