Tata Steel - Worst is over for TSE; Inventory write-down improves outlook; Maintain 'BUY' - TP Rs552 - PINC Research

Q3FY12 Result Review - Tata Steel

Worst is over for TSE; Inventory write-down improves outlook

Tata Steel's Q3FY12 consol. revenue grew 14% YoY to Rs331bn on account of higher realisations (up 12% YoY aided by 13% YoY rupee depreciation) and 2% YoY growth in group sales volume. However, adj. EBITDA declined 33% YoY to Rs23bn as EBITDA/t in India contracted 13% YoY to USD307 on higher operating cost, while Tata Steel Europe (TSE) reported EBITDA loss of USD1.2/t on lower realisation and higher cost. Consol. OPM at 6.9% contracted 482bps YoY to a 9-qtr low. Adj. net profit at Rs325mn declined 97% YoY. However, Tata Steel reported net loss of Rs6bn (vs. profit of Rs10bn in Q3FY11) due to inventory write down of Rs7.4bn at Tata Steel Europe.

Tata Steel India: Sales declined 1% YoY to 1.62mnt. Blended EBITDA/t at USD307 declined 13% YoY on higher input cost, mainly coking coal, despite blended realisation being up 1% YoY to USD933/t on increased retail sales and favorable sales mix. Ferro alloys performance, though down YoY, improved QoQ on higher volume.

TSE: TSE turned loss making at adj. EBITDA level (EBITDA loss of USD1.2/t). Reported EBITDA loss is even higher due to USD143mn of inventory write-down. Weak demand in Europe, further impacted by destocking, led to a USD55/t QoQ decline in blended realisation. Capacity utilisation declined to 85% (86% in Q3FY11).

South East Asian operations posted USD2mn losses at EBITDA level (EBITDA/t of -USD3) on lower realisations (down 15% YoY) and higher input cost, despite 6% YoY growth in sales volume.

Projects update: 2.9mntpa brownfield expansion (Q4FY12E), Mozambique (end FY12) and New Millennium (FY13-14) are on schedule.

Balance Sheet: As of Q3FY12, Tata Steel has consolidated adjusted net debt of USD9.1bn with adj. net debt/equity of 1.5x vs. 1.4x in Q2FY12.

Warrants update: Tata Sons converted 120mn warrants into equity at Rs594/sh.

OUTLOOK AND RECOMMENDATION

We believe with EBITDA losses in Q3 and inventory write-down of USD143mn, the worst is over for TSE and it is set to benefit from favorable tailwinds i.e. improving macro factors in developed economies, rising steel prices in Europe (up 8% in 2012) amidst improving demand, softening RM cost and low cost of inventory post the write-down. Further, with the commissioning of 2.9mntpa expansion in Q4FY12E, the share of highly profitable Indian operations is set to rise in FY13E & FY14E. Hence, despite lower steel price assumptions, we estimate Tata Steel's consol. EBITDA and EPS to grow at a CAGR of 18% and 46% respectively over FY12E-FY14E. We find the stock attractive at CMP of Rs475, 5.2x FY13E EV/EBITDA and maintain BUY on the stock with a revised target price of Rs552 (5.7x FY13E EV/EBITDA).

Source : Equity Bulls

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