Buy Tata Sponge; target of Rs 1160: Centrum

Centrum's research report on Tata Sponge

We maintain Buy on Tata Sponge (TSIL) with a revised TP of Rs1160. Q2 results were weak due to exceptional circumstances which led to high iron ore and maintenance cost. Overall, we expect strong operational performance during FY19-20E led by robust pricing, healthy spreads and increasing volumes as additional EC clearance of 40ktpa is expected soon. Clarity on capex towards the build-up of new steel complex is still elusive but strong cash rich balance sheet provides comfort. Valuations remain attractive at 2.3x FY20E EV/EBITDA making risk-reward favorable.

Outlook

We revise our TP to Rs1160 and maintain buy. Key downside risks are fall in sponge iron prices and higher coal costs.