Tata Steel - Quarterly Update - Elara Capital

Worst is behind

Write-downs mar the consolidated picture

Tata Steel reported its consolidated earnings which were lower than our estimates due to worse than expected performance in Europe. It has taken inventory write downs of INR 7,417mn, primarily in Europe which dented the consolidated profits even more. The revenues for the quarter were up 1.4% QoQ but the EBITDA fell 5.7% QoQ due to higher cost pressures, lower volumes despite marginally higher realisations. Going ahead however, we believe, the consolidated picture will improve as Corus is likely to perform better as compared to the current quarter. The profitable Indian operations are likely to register volume growth in FY13 on the back of brownfield capacity completion (2.9mn tonnes) at Jamshedpur.

Highlights for the quarter

The Indian operations registered a sequential volume decline of 2% QoQ. The EBITDA/tonne in Indian operations stood at INR 14,775 as compared to INR 17,024 in Q2FY12 and INR15,578 in Q3FY11.

Corus volume sales stood at 3.35mn tonnes, which was a decline of 6.2% QoQ and 3.5% YoY. Corus incurred EBITDA loss of USD2.2/tonne (after adjusting for inventory write downs) as compared to EBITDA of ~USD 26.6/tonne in Q2FY12 and USD21.3/tonne in Q3FY11.

Valuation & recommendation

We believe, the worst is behind for Tata Steel as the steel prices in Europe have started strengthening. The raw material prices have been softening marginally which should also be a comforting factor for the European operations. The Indian operations will be benefited due to the capacity increase at the Jamshedpur plant. Going ahead, we believe, the Indian operations will continue to provide strong EBITDA growth, while Corus should manage to operate at relatively stable profitability. We have marginally increased our target price as a result of roll over to FY13. Thereby we arrive at our target valuation of INR500 and recommend Accumulate on the stock.

Source : Equity Bulls

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