October 26, 2016 / 18:28 IST
We retain Hold on Tata Sponge (TSIL) as outlook on spread improvement remains clouded on account of increase in coal & iron ore costs negating a major portion of sponge iron price improvement. Q2 earnings improved sequentially but remained below estimates primarily because of weak realisations and increase in coal costs. Re-rating triggers remain missing with no plans outlined for usage of high cash balance and recovery of cash (Rs1.8bn) stuck in erstwhile coal block delayed. Stock trades at FY18E EV/EBITDA of 3.9x which is fair and provides limited upside.
We had downgraded TSIL post Q1FY17 results and stock has moved sideways in last few months and currently trades at FY18E EV/EBITDA of 3.8x. We value the company at 4x Mar’18E EV/EBITDA and assign 50% value for the company’s carrying value investment of Rs1.8bn in the coal block to arrive at a fair value of Rs720/sh. Retain Hold. Key downside risks are fall in sponge iron prices and higher coal costs, while upside risks are quick recovery of cash from coal block and higher sponge iron prices.
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