Tata Steel - Q4FY12 Result update - Centrum

Positive triggers still not in sight, maintain sell

Tata Steel reported consolidated PAT of ~Rs4.3bn (our est. Rs1.8bn) on account of better than expected operational performance in overseas units and Rs2bn profit from its associate unit in Philippines. Consolidated EBITDA stood at Rs31.8bn (margin of 9.4%) as European operations turned EBITDA positive despite lower realizations but domestic operations remained subdued due to wage provisioning costs. We expect overall profitability to improve going forward on account of lower raw material costs and expansion in India but see concerns related to European operations continuing as further maintenance is announced which would affect volumes and keep capex requirements high. We revise our estimates lower and remain well below consensus with our continued negative stance on the European operations, lower margin profile in domestic operations on reduced backward integration post expansion and high interest costs on account of the large debt pile which refuses to come down as annual group capex remains ~US$2.5bn. We maintain sell with a target price of Rs 393.

- Standalone results lower due to wage provisions: Domestic sales volume stood at ~1.76MT and higher wage costs (provisioning of ~Rs2bn done for expected new wage agreement) resulted in EBITDA margin of 31.9%, a marginal improvement of only 10bps sequentially despite improvement in realizations and lower raw material costs. Flat product sales were highest ever at 3.74 MT in FY12 and long product sales through retail distribution went up by 43% YoY in FY12. The 2.9mtpa steel expansion has begun phased commissioning with blowing in of the blast furnace.

- Corus reports positive EBITDA, but remains in a tight spot: Corus turned EBITDA positive with an EBITDA/tonne of ~US$8 as raw material costs dropped and mitigated the impact of 5% QoQ drop in realizations. Restructuring and maintenance of operations continues at Corus and one of the blast furnaces at Port Talbot has been taken down for complete rebuilding. South-East Asian subsidiaries improved their operational performance QoQ and reported EBITDA of ~US$29/tonne on account of ~10% QoQ increase in sales volumes and lower raw material costs. As a result of better operational performance in subsidiaries, cons. EBITDA stood at Rs31.8bn with a margin of 9.4%.

- Analysts' meet highlights: The Company expects 1 MT of sales from 2.9 mtpa expansion in Jamshedpur which is under trial run. We expect EBITDA margin of 33.2%/33.4% in FY13E/14E on a standalone basis as integration on the coking coal front would drop post expansion and product mix will get skewed towards flats, keeping overall realizations in check. European operations continue to see operational improvements and maintenance and blast furnace rebuild at Port Talbot has been undertaken recently. The company sees FY13E volumes in line with FY12E but expects pressure on EBITDA in the wake of lower prices and demand. We expect European operations to deliver 13.5 MT of sales volume with EBITDA/tonne of US$25 in FY13E. We revise our consolidated EBITDA estimates lower by 4%/6.4% for FY13E/14E.

- Maintain sell: We continue to remain skeptical on subsidiary earnings going forward and are equally concerned on elevated maintenance capex which is keeping debt levels high. We value the company on SOTP basis with domestic operations at 5.5x FY14E EV/EBITDA and Corus & South-east Asian subsidiaries at 4x FY14E EV/EBITDA to arrive at a target price of Rs393. Maintain sell.

Source : Equity Bulls

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