Reiterate 'buy' on Tata Steel – TP Rs.489 - Geojit BNP Paribas Financial Services

- Buy rating on Tata Steel is reiterated with a target price of Rs.489 over one year.

- The main concern on Tata Steel has been the extent of weakness in Europe. But the current perception is that even in the midst of current weakness, Corus should deliver USD 20-30 EBITDA / ton versus the earlier estimate of USD 28 EBITDA / ton.  Margins should improve further in 2HFY13 with the Pt Talbot rebuild and easing in China.

- With upward re-pricing of contracts in 1QFY13, Corus ASP (average sales price) have improved USD 20-25/ ton qoq. With the decline in coking coal prices, Corus should comfortably deliver USD 20-30 EBITDA / ton in 1QFY13.

- Comments from other European steel makers also suggest a clear upturn in 2Q12 margins versus 1Q12 levels.

- The stock has been trading close to its trough valuation. It is expected that the stock would reverse its year to date de-rating driven by 2H12 policy easing in China and Europe.

- With the stock price implying almost no FY13 EBITDA margin for Corus, the risk-reward ratio is favorable.

- Jamshedpur/ Benga ramp up and Pt Talbot rebuild are near term triggers for the stock.

- However, project delay and further worsening of European turmoil are key downside risks.

- European steel makers' comments suggest that not all is lost. Even though they estimated demand decline in 2012, it is likely to be lower than 5% because demand and margins should start improving by 2Q12 and demand/ margins for 2H12 should be better than 1H12.

- Contract prices, especially semi-annual prices have started some upward revisions.

- Threat from imports has also diminished because of the weakness in Euro and the European steel prices are close to landed imports.

Source : Equity Bulls

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