Tata Steel Ltd : ACCUMULATE on every dip.

Scrip Code: 500470 / TATASTEEL

CMP:  Rs. 614; Buy at Rs.590 - 610.00;
Short term Target: Rs. 680.00, LT – Rs. 750;Market Cap: Rs. 58,895.76 Cr;52 Week High/Low: Rs. 737.00 / Rs. 449.10;Total Shares: 95,92,14,450 shares; Promoters : 29,34,92,790 shares –30.60 %; Total Public holding : 66,57,21,660 shares –69.40 %;Book Value: Rs. 388.24; Face Value: Rs. 10; EPS: Rs. 76.32; Div: 80 %;P/E: 8.05 times; Ind P/E: 11.44; EV/EBITDA: 8.29.

Total Debt: Rs. 27,287.73 Cr; Enterprise Value: Rs. 90,962.30 Cr.

Tata Steel Limited was established by Mr. Jamsetji Nusserwanji Tata in 1907. It was formerly known as The Tata Iron and Steel Company Limited and changed its name to Tata Steel Limited in 2005. Tata Steel Limited is a diversified steel producer. It has a global presence in 50 markets and manufacturing operations in 26 countries. The Company provides steel for different industries, which include construction, automotive, aerospace, consumer goods, materials handling, energy and power, rail, engineering, shipbuilding, packaging, and security and defense. Tata Steel manufactures and processes steel, which includes hot-rolled coil through to high-gloss, pre-painted perforated blanks, wire rod and wire, sections, plate, bearings and tubes.  Its major branded products are Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Pipes, Tata Bearing and Tata Agrico. On 20 October 2009, TATA STEEL won bid to acquire Anglo – Dutch steelmaker CORUS at $7.6 billion. On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, totally valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group.

Domestic operation to remain out performer

Tata Steel India has been showing robust performance and the management is very confident that it would continue to out performer with lower cost of production due to good backward integration and strong growth in domestic demand. The company should see a volume of 1.68 million tonnes during Q4FY11. For FY12 it expects a volume of 6.8 mt from the domestic operation, which suggests the 2.9 mtpa brown field expansion in Jamshedpur to add primarily to FY13 volume. The expansion project is on track and the blast furnace is likely to be commissioned by August 2011 itself. Orissa project also has been kicked off with basic civil works etc. Tata Steel has been focusing to increase its market share in value added categories. JV with Nippon Steel and Bluescope steel, setting up of CR mill in Tinplate Company etc are steps in that direction.

Overseas operations likely to stabilize going forward

Concerns still remain on the overseas operations especially in the South East Asian markets. Low difference between scrap and rebar prices has been a concern for Nat Steel, while lack of major spending by the government, political stability along with higher raw material costs have been putting pressure on Thailand operations. The management however feels things to be stabilized in the coming quarters. TSE on the other hand should not see much improvement in EBITDA/ tonne during Q4FY11, however, the incremental impact of the price hike should help it to post much better numbers during Q1FY12. For FY12 TSE is likely to post a volume of 15 mt.

Riversdale mining has been a strategic investment for Tata Steel. The company currently has 27.1% stake in Riversdale which is valued at Rs.4796 Cr (Rs.50/sh) and is not in the process of selling any stake. New Millennium DSO project is likely to start operation in Q2FY12. In FY13 the company is likely to get 2 mt iron ore. Consolidated debt position remains above US$11bn and the management does not expect that amount to go up significantly. Further money rising of Rs 2000- 2500 Cr can be done through (click) perpetuity bonds.

Outlook and Valuations

At the CMP of Rs. 614, the stock is trading at 8x its FY12E EPS and 5x FY12E EV/ EBITDA. It is believed that the domestic operation would continue to perform well due to better demand and stronger backward integration. On the overseas subsidiaries, the value of domestic operation comes at 6.5x FY12 EV/ EBITDA and overseas subsidiaries at 4x FY12 EV/ EBITDA to reach a fair value of Rs 695/ share. Domestic operations to be the backbone for the company due to better backward integration and strong demand growth expected in India. Price hike during January to March period across different product categories in various stages should improve the EBITDA/ tonne for Q4FY11. Concerns remain on overseas operations due to higher costs. Volume is likely to be higher from Tata Steel Europe (TSE), however, not for the South Asian operations. Factoring in the concerns the FY11 and FY12 EPS comes to Rs 58.7 and Rs 62.0 respectively. Target price to Rs 695/ share; A ACCUMULATE on the stock.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E
SALES (Rs. crs)	1,47,329.3	1,02,393.1	1,13,064.8	1,20,086.7
NET PROFIT (Rs. crs)	9,045.4	(643)	6,068	6,405
EPS (Rs.)	104.1	(6.8)	58.7	62.0
PE (x)	4.4	--	10.8	10.3
P/BV (x)	1.6	2.4	1.8	1.4
ROE (%)	26.4	--	18.8	16.0
ROCE (%)	13.7	--	9.7	9.9

I have accumulation status on TATASTEEL with the price target of Rs. 680 in short term. For long term my target is of Rs.750. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.