Buy Tata Steel; target of Rs 498: Dolat Capital

Dolat Capital is bullish on Tata Steel and has recommended buy rating on the stock with a target of Rs 498 in its May 21, 2012 research report.

“Tata Steel’s consolidated loss, at 4.33bn (Dolat est: Rs 8.46bn), missed estimates as the higher interest cost +7%QoQ and tax rate of 86% vs est 51% despite higher associate income. Tata Steel has commissioned its 2.9 mn tonne steel expansion will drive volume growth. Ongoing improvement in European operations and commissioning of raw material projects will aid earnings. Maintain Buy with a price target of Rs 498.”

“Tata Steel Europe (TSE) sales volumes at 3.55mn tonnes (+6%QoQ) despite lower production at 3.2mn tonne (-8.8%QoQ) which got impacted by the problems at BF at Port Talbot. Realisations fell by 4.5% QoQ to USD1103 per tonne as TSE was able to capture the buoyant spot market due to lower production volumes. EBITDA per tonne at USD 8 per tonne were inline with estimates. TSE has guided for flat production in FY13 vs FY12 as it had built slab inventory for loss in production volumes due to rebuild of BF at Port Talbot. The rebuild of BF will lead to incremental volumes of 500kt in FY14. India(TSI) sales volumes were up by 9.1% QoQ to 1.77mn tonnes. Steel realisations rose by 3.6%QoQ to Rs 46921 per tonne inline due to buoyant long products market. EBITDA of Rs 29.9bn,(DCe: Rs 29.3bn) was impacted by Rs 2.2bn increase in employee cost as it made provision for wage revision whereas higher other expenses were impacted by forex loss of Rs 2.5 below estimates at Rs 27.3bn impacted by higher cost of coal by Rs 2.3bn and freight cost. EBITDA per tonne rose by 9.2%QoQ to USD331 per tonne on back of strong realisations.”

“We believe Tata Steel, will have improvement in margins in FY13E, given the higher share of profitable India operations with the commissioning of 2.9 mtpa expansion, raw material projects (Coking coal in Mozambique and Iron ore in New Millenium), and improved profitability at TSE due to softening in raw material prices. We maintain our Buy rating on the stock with a price target of Rs 498 based on SOTP,” says Dolat Capital research report. 

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