TATA STEEL: CREATING A VALUE FOR NATION !!!

Scrip Code: 500470 / TATASTEEL

CMP:  Rs. 461.85; Buy at Rs.445 - Rs.455 levels.
6 month Target – Rs. 495; STOP LOSS – Rs. 418.60; Market Cap: Rs. 44,855.53 Cr; 52 Week High/Low: Rs. 619.00 / Rs. 332.10

Total Shares: 97,12,14,450 shares; Promoters : 30,45,14,362 shares –31.35 %; Total Public holding : 66,67,00,088 shares – 68.64 %; Book Value: Rs. 497.09; Face Value: Rs. 10.00; EPS: Rs. 70.46; Div: 120 % ; P/E: 6.55 times; Ind. P/E: 7.30; EV/EBITDA: 5.82.

Total Debt: 28,301.14 Cr; Enterprise Value: Rs. 80,273.78 Cr.

TATA STEEL LTD:  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. Tata Steel’s principals products include flat rolled products of Non-Alloy Steel of a width of 600 millimeter and hot rolled coils of thickness 1.66 millimeter; tubes/pipes of circular section with outer diameter up to 114.3 millimeter, not cold rolled & flat rolled products of iron or non alloy steel of width of 600 millimeter or more, cold rolled (cold-reduced), not clad, plated or coated of a thickness of 0.5 millimeter or more but less than 3 millimeter. Company also provides steel for different industries, which include construction, automotive, aerospace, consumer goods, materials handling, energy and power, rail, engineering, ship-building, 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. In 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. In September 27^th 2011, Tata Steel merged Centennial Steel Company Ltd with itself.  TATA STEEL’s production facilities include those in India, UK, Netherlands, Thailand, Singapore, China and Australia. TATA STEEL is compared with SAIL locally and with JFE Holdings Incorporated (Japan) & Angang Steel Company Ltd (Hong Kong) globally.

Investment Rationale:

Over the years, Tata Steel’s domestic operations have exhibited robust performance on the back of high raw material integration and superior product mix. Domestic steel product prices have increased by Rs. 1,500- Rs. 2,000/ton over the last three months, coupled with a decline in coking coal costs and higher volumes which would lead to margin expansion in Q4 FY12. The 2.9 metric ton per annum expansion is likely to be commissioned in April 2012 and would require some time to stabilize and integrate the whole complex. It is expected that the new capacity will contribute additional 1million tons of saleable steel each over the next two years. Stable steel prices, superior product mix coupled with lower coking coal prices YOY would lead to higher EBIDTA/ton in FY13. The standalone operation is expected to witness an EBIDTA CAGR of 20.6 % over FY12-14. This would generate nearly Rs. 16,200 Cr of operating cash flow over the same period and would fund major part of the capex for its Odisha steel project. The spot prices in Europe have recovered to US$70 - $80/ton since January. However, this would impact Tata Steel’s realisations only from March 2012, as any change in spot prices will impact Tata Steel’s realisation with a lag. It is expected that the realisations to increase by US$25/ton QoQ in Q4 FY12. And with an uptick in steel prices and a decline in raw material costs (both iron ore and coking coal), the company would post positive EBIDTA in Q4 FY12. However, the performance would be restricted by one-offs like impairment charges and restructuring costs. On the back of various restructuring process, revival in European demand and higher steel prices YoY, an EBIDTA/ton of US$50/ton in FY14 is accepted. After the stabilization in FY13, it is expected that the plant will add a further 1mtpa in FY14, leading to a volume CAGR of 15.8 % over the period FY12-14. Tata Steel India can deliver 1.73mn tons in Q4 FY12, 7.7mn tons in FY13 and 8.8mn tons in FY14. Besides exporting to few countries, the company targets to sell incremental steel in the domestic market. This would be in the niche market of value added products, where it is already among the leaders. Out of the total outlay of Rs. 16,000 Cr, the company has already spent Rs. 2,500 Cr of capex till date and is expected to spend Rs. 5,000 Cr in FY13E. The company has reduced its manpower from 7,223 to 6,683 at the end of December 2011 and is expected to reduce it further to 5,750 by FY12-end. It is expected that the EBIDTA/ton to be US$30/ton in Q4 FY12 and remain around this level for FY13. On the back of various restructuring processes initiated by the company in FY12 & revival in European demand and higher steel prices YOY, an EBIDTA/ton of US$50/ton in FY14 is accepted. Tata Steel recently reported its 4QFY2012 production and sales numbers; Company's 4QFY2012 crude steel production grew by 2.6 % YoY to 1.8mn tonnes and its sales volume grew by 3.3 % YoY to 1.7mn tonnes. For FY2012, the company's crude steel production and sales volume increased by 3.9 % and 3.4 % YoY to 7.1mn tonnes and 6.6mn tonnes, respectively. These numbers are broadly in-line with the market’s expectations. 

Outlook and Valuation:

Steel players in India had hiked flat steel product prices by Rs. 1,000/ton each since Jan 2012. However, due to subdued market conditions and some resistance from the consumers, the steel players have reduced prices over the last one month. In the case of long product category, the increase in steel prices has been steady and has been accepted by the market. Indian long steel prices has raised by Rs. 1,500 - 2,000/ton in Q4 FY12 due to improving demand from the infrastructure space and production cuts taken by the smaller players. On account of the high iron ore and coal costs, small steel players have taken production cuts as it has become unviable to them to operate. This would help the larger producers like Tata Steel in gaining market share and maintain prices at current levels. Steel prices will decline marginally during the year on the back of lower raw material costs and subdued demand. The impact of lower steel prices globally would be reduced due to the increase in import duty on HRC and the depreciation of the rupee against the dollar. The commissioning of new capacities during the year would also add to the pressure on steel prices in the domestic market. On an average, blended steel realization to decline 2 % YoY is expected in FY13 and then strengthens to 3 % YoY in FY14. The domestic operations would continue to be the earnings driver for Tata Steel over the next two years. Even though near term earnings in Corus would remain under pressure due to one-off items, it is expected that the Corus will deliver steady EBIDTA/ton over FY13-14. Tata Steel is expected to report strong earnings over the next two years due to the factors like the impact of new 2.9mtpa capacity, impact of restructuring exercise in Europe, like the benefits from overseas raw material projects. After the recent correction in the stock over the last six months, Tata Steel is trading at a discount to its peers. The Indian business of Tata Steel at a 6.5 x EV/EBITDA multiple and the European business at 4.5 x, is justified as the Indian operation is self-sufficient in terms of raw materials (100 % iron ore and 50 % coking) and deserves a decent premium vis-à-vis Corus, which is not self sufficient. Stock continues to offer an attractive opportunity given the distress valuations of European operations at EV/tone of US$200 & the strong domestic operations and increased raw material self-sufficiency from current 33  % to 50 % in iron ore and 18 % to 23 % in coking coal (by FY13 end). At the current market price of Rs. 461.85, the stock is trading at a PE of 17.83 x FY12E and 10.71 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 25.90 in FY12E and Rs. 43.10 in FY13E. One can buy TATA STEEL with a target price of Rs. 495.00 for Medium to Long term investment.

KEY FINANCIALS	FY11	FY12E	FY13E	FY14E
SALES (Rs. Crs)	1,18,753.10	1,28,344.10	1,23,146.60	1,32,914.20
NET PROFIT (Rs. Crs)	5,933.70	2,512.60	4,185.50	6,710.50
EPS (Rs.)	61.90	25.90	43.10	69.10
PE (x)	7.40	17.80	10.70	6.70
P/BV (x)	1.20	1.10	1.10	1.00
EV/EBITDA (x)	5.80	7.20	6.00	5.10
ROE (%)	20.30	6.60	10.10	15.10
ROCE (%)	8.70	4.40	6.40	9.00

I would buy TATA STEEL LIMITED with a price target of Rs. 495 for Medium to Long. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 418.60 on every purchase.
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