Hold Tata Sponge; target of Rs 1165: Centrum

Centrum's research report on Tata Sponge
We downgrade Tata Sponge (TSIL) to Hold with a revised TP of Rs1165 as recent sharp run-up leaves limited upside on the table given the fact that surplus cash on books would be deployed as CWIP for steel plant capex over FY19-20E. TSIL’s spreads in sponge iron business have continued to improve and outlook on the sustenance of the same is strong which gives confidence of smart uptick in earnings over FY18-19E. Q3 earnings were strong YoY led by better pricing and company remains on track to achieve its full year volume targets. Stock trades at FY19E EV/EBITDA of 4.9x and a five year AOCF/EV yield of 6.8% which is fair.

Outlook

We revise our TP higher to Rs1165. Downgrade to hold as recent strong rally leaves limited upside. Key risks are fall in sponge iron prices and higher coal costs.

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