TATA STEEL : ACCUMULATE AT EVER LEVEL !!

Scrip Code: 500470 / TATASTEEL

CMP:  Rs. 318.70; Buy at every dips.

6 month Target – Rs. 346.63; STOP LOSS – Rs. 293.20; Market Cap: Rs. 30,952.62 Cr; 52 Week High/Low: Rs. 455.60 / Rs. 292.50. Total Shares: 97,12,15,229 shares; Promoters : 30,45,14,362 shares –31.35 %; Total Public holding : 20,03,36,150 shares – 68.65 %; Book Value: Rs. 537.64; Face Value: Rs. 10.00; EPS: Rs. 54.72; Dividend: 120 %; P/E: 5.82 times; Ind. P/E: 6.18; EV/EBITDA: 5.96.

Total Debt: 52,212.32 Cr; Enterprise Value: Rs. 73,454.86 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 with an annual crude steel capacity of over 26.5 million tonnes per annum. It has a global presence in 50 markets and manufacturing operations in 26 countries. The company has over 80,000 employees across five continents and is among Fortune 500 Company. 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 also 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 (A company formed through merger of British Steel and Konnklijke Hoogovens in October 1999) at $7.6 billion. On January 30, 2007, Tata Steel purchased a 100 % stake in the Corus Group at 608 pence per share in an all cash deal, totally valued at US$ 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 2010, Corus name was changed into TATA Steel Europe. In September 27th 2011, Tata Steel merged Centennial Steel Company Ltd with itself. In July 2012, the company sold its stake in HKS Scrap Metals bv to Euro Scrap Alliance. TATA STEEL’s production facilities include those in India, UK, Netherlands, Thailand, Singapore, China and Australia. TATA STEEL is locally compared with SAIL, JSW Steel, Jindal Steel and Power, VISA Steel and Rashtriya Ispat Nigam and globally with ArcelorMittal SA of Luxembourg, Hebei Iron and Steel of China, Wuhan Iron & Steel Co Ltd of China, POSCO of South Korea, Nippon Metal Industries Co.,Ltd of Japan, JFE Holdings Incorporated (Japan) & Angang Steel Company Ltd (Hong Kong), Sumitomo Metal Industries Ltd of Japan, Severstal of Russia and Hyundai Steel Company of South Korea.

Investment Rationale:

TATA STEEL LTD will amalgamate its listed subsidiary Tata Metaliks (TML) and its 100% subsidiary Tata Metaliks Kubota Pipes Ltd – a subsidiary of TML with itself. Tata Steel holds 50.09% stake in TML and shares held by them in TML will be extinguished and the public shareholders of TML will be issued shares of Tata Steel in the ratio of 4 equity shares of Rs. 10 each of Tata Steel for every 29 equity shares of Rs.10 each held in Tata Metaliks Ltd. This merger will help Tata steel in envisaging synergies through aligning the activities of single value chain with one legal entity. TML through constant up-gradation in technology and setting up its second mini blast furnace has enhanced its capacity of Pig iron from 90,000 tpa in 2004 to 3,50,000 tpa today. TML has recently commissioned a 40 m2 sinter plant at Kharagpur site to produce about 0.4 mtpa of sinter at a capex of Rs. 100 Cr. TML products are sold to foundries all over India. As far as Tata Metaliks Kubota Pipes ltd is concern it is a 100% unlisted subsidiary of Tata Metaliks Ltd and was established in 2007 as a JV between TML, Kubota (Japan) and Metal One (Japan) for producing ductile iron pipes used for water distribution mainly used by the infrastructure sector. Tata Steel Ltd has amalgamated Kalimati Investment Company Limited (KICL) with itself effective from January 1, 2013 after the requisite approvals and sanction being received including approvals and orders under Sections 391 - 394 of the Companies Act, 1956. Tata Steel India has recently undergone 2.9 mtpa brownfield expansion at Jamshedpur. It is planning 6 mtpa green-field expansion in Odisha in two phases of 3 mtpa each. It also has 80% stake in the DSO (Direct shipping ore) project in Canada, balance 20% stake is owned by New Millennium Iron Corporation (NML). Tata Steel has 27.4% in NML. Cumulatively, the capex of all the three projects is expected to be around Rs. 44,100 Cr. Tata Steel Europe has completed the BF 4 at Port Talbot after spending US$ 22.3 Cr. Tata Steel realized about 96 million tonnes in consideration during the first nine months ended December through the sale of or divestment of small-sized businesses to reduce complexity across multiple jurisdiction as part of the on-going portfolio management work at Tata Steel Europe. TATA Steel has recently issued SGD 300 million 4.95% Senior Unsecured Notes due for 2023. These notes are guaranteed by TATA Steel Ltd. These notes represent unsecure obligation of the isuer and will rank pari passu with all its existing future unsecured obligations. These notes will be listed on the Singapore Stock Exchange.

Outlook and Valuation:

Global steel capacity utilisation remains at 77% implies significant over capacity. Moreover, Sovereign debt issues and austerity measures in the Eurozone are hurting consumer sentiment and steel demand which remains the key enablers for improvement in the current scenario. While Indian economy and steel demand continues to grow, albeit at a slower pace, sentiment in China is improving on account of Government spending on infrastructure projects. However, a sceptical view on the demand outlook for steel products remains in near term. In Mozambique, Tata Steel is in the process of developing a coking coal mine and an iron ore mine in Canada to enhance integration levels of the company. The total capex remaining for the Mozambique project is US$100mn–150mn, while the Canadian project will involve capex of CAD350mn. These backward integration projects at Mozambique and Canada will boost the company's earnings beginning FY14. The Orissa project will benefit from captive iron ore, lower logistics cost and efficiencies of a modern plant. A ROE's of 15-20% for the project is expected. Tata steels’s long term strategy of building high margin 16 mtpa steel capacity in India is a big positive. The stock trades at 6.8 x FY14E EV/EBITDA valuation. After the recent correction in the stock over the last couple of months, Tata Steel is trading at a discount to its peers. The Indian business of Tata Steel is at a 5 x EV/EBITDA multiple at Rs. 476.88/share and the European business at 5 x at Rs. 252.6/share, 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 & 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. 318.70, the stock is trading at a PE of 8.70 x FY14E and 7.27 x FY15E respectively. The company can post Earnings per share (EPS) of Rs. 36.60 in FY14E and Rs. 43.80 in FY15E. One can buy TATA STEEL with a target price of Rs. 346.63 for Medium to Long term investment. 

SOTP valuation (FY2013E)

BUSINESS SUBSIDIARY	Value per Share(₹)
Core Business	476.88
Tata Steel Europe (5 x FY13E EV/EBITDA)	252.60
Jamshedpur 3mpta plant & Other projects.	178.00
Value of Other Subsidiaries	93.20
TOTAL VALUE	1000.68
Less:  Debt	654.05
TOTAL VALUE PER SHARE	346.63

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (₹ Crs)	132899.70	126382.70	153830.50	157542.30
NET PROFIT (₹ Cr)	2,027.90	2,346.80	3,556.60	4,250.50
EPS (₹)	20.90	24.20	36.60	43.80
PE (x)	18.20	14.20	10.40	8.70
P/BV (x)	0.90	0.90	0.90	0.80
EV/EBITDA (x)	7.00	8.10	6.80	5.70
ROE (%)	5.20	0.20	5.00	9.60
ROCE (%)	4.60	2.50	6.00	6.70

I would buy TATA STEEL LTD with a price target of ₹ 346.63 for Medium to Long term target. 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 ₹ 293.20 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*As the author of this blog I disclose that I do hold TATA STEEL LTD in my investment portfolio. 

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