Tata Sponge Iron - 4QFY2012 Result Update - Angel Broking

For 4QFY2012, Tata Sponge Iron Ltd. (TSIL) reported better-than-expected top line at Rs.184cr, 15.5% higher than our estimate of Rs.159cr, on account of better sales volume and improved sponge iron realization. The company's EBITDA margin plunged by 493bp qoq to 13.9% in 4QFY2012 from 18.8% in 3QFY2012 on account of higher raw-material prices as a percentage of sales and increased other expenses. Net profit decreased by 12.7% qoq to Rs.15cr in 4QFY2012 as compared to Rs.17cr in 3QFY2012. We continue to maintain our Buy recommendation on the stock.

Resumption of sales volume drives revenue growth: TSIL's capacity utilization improved from 57% in 3QFY2012 to 74% in 4QFY2012 on the back of recovery in transportation of iron ore issues, which had impacted iron ore supply in the last quarter, thus impacting sponge iron production. This coupled with improved sponge iron prices led to a 40.5% qoq increase in the company's top line to Rs.184cr in the quarter. The company's EBITDA margin plunged by 493bp qoq to 13.9% due to increased raw-material cost, primarily coal. Net profit was impacted by provisioning of Rs.5.4cr as finance charge on account of interest charges on excise duty dispute of FY2008.

Outlook and valuation: We expect TSIL to post a 17.5% CAGR in its revenue over FY2012-14E, resulting from better capacity utilization. The company's EBITDA margin is expected to expand by 122bp to 19.0% in FY2014E from 17.8% in FY2012 due to stability in raw-material prices. PAT is expected to post a 21.8% CAGR over FY2012-14E to Rs.112cr in FY2014E from Rs.76cr in FY2012. The stock is currently trading at a PE of 4.2x FY2014E earnings and P/B of 0.6x for FY2014E. We maintain our Buy recommendation on the stock with a revised target price of Rs.420, based on a target P/B of 0.9x for FY2014E.

Source : Equity Bulls

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