Tata Sponge Iron - 2QFY2013 Result Update - Angel Broking

For 2QFY2013, Tata Sponge Iron Ltd (TSIL) reported a top-line growth of 12.6% to Rs.196cr from Rs.174cr in 2QFY2012. However, the EBITDA margin contracted by 57bp on account of higher raw material cost as a percentage of sales. The net profit grew by 18.6% to Rs.26cr in 2QFY2013 from Rs.22cr in 2QFY2012 primarily due to one-time higher other income.

Revenue growth normalizes, margin contracts: After a year of iron ore transportation issues, which impacted TSIL's top-line performance, there has been a recovery in the company's capacity utilization to 81% in 2QFY2013 from 70% in FY2012. However, this was lower sequentially from 94% in 1QFY2013 owing to a planned shutdown during the quarter. The net raw material cost increased inspite of a fall in imported coal prices on account of utilization of high cost inventory from the previous quarter. This led to a contraction in the EBITDA margin by 57bp yoy to 16.6% in 2QFY2012. Recent media reports on deduction of bank guarantee for the Talcher coal block has been a matter of concern for the company. However, the company has not received any official notice regarding the same.

Outlook and valuation: We expect TSIL to post a 12.5% CAGR in its revenue over FY2012-14E resulting from an improvement in the sales volume. The EBITDA margin is expected to expand by 62bp over FY2012-14E to 18.4% in FY2014E due to softening of raw material prices. The PAT is expected to grow at 18.6% CAGR over FY2012-14E to Rs.106cr in FY2014E from Rs.76cr in FY2012. The stock is currently trading at a PE of 4.7x its FY2014E earnings and P/B of 0.7x for FY2014E. We maintain our Buy recommendation on the stock with a revised target price of Rs.384, based on a target P/B of 0.8x for FY2014E.

Source : Equity Bulls

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