Buy Tata Steel - BP Wealth Diwali Picks 2012

Tata Steel is the sixth-largest steel company in the world with the existing crude steel production capacity of 30 MTPA. The company has created its manufacturing capacities Europe, Southeast Asia and the Pacific Rim countries through Corus, Millennium Steel and NatSteel Holdings, Singapore.

Investment Rationale

Volume growth to continue for domestic market (Tata Steel India)

We believe Tata Steel's production volume of deliver saleable steel to increase by ~10% to ~7.2MT in FY13 and by more than 20% to 8.9MT in FY14. We expect significant increase in volume as the additional capacity of ~3MTPA is expected to start contributing by Q3FY13.

European Operation to stabiles on the back of Improvement in demand scenario and blast furnace

Tata Steel European operation is expected to remain under pressure in 2HFY13 as seasonal summer slowdown as well due to overall slowdown in Automobile sales. However, going forward we expect the demand scenario to improve and higher cost saving on the back of improvement in blast furnace at Port Talbot. Therefore, we expect the overall performance of Tata steel- Europe to improve in FY14.

Stable raw material supply

Tata Steel's European unit would get its coking coal shipment from its Benga project in Mozambique. We expect further shipment to continue going forward.

Valuation & Outlook

Tata Steel has done many strategic acquisitions and we believe they will contribute substantially in consolidated profits in the long term. We have used SOTP based valuation method to value this stock. we value the India operations at 6.0x and 5.0x for Asia & European operations with FY14E EBITDA estimates. We arrived at a target price of Rs 510 per share which provides potential upside of 26.5% from current level.

Technical Outlook

The stock has reversed after taking support at the lower trend line which is drawn parallel to the upper trendline on its weekly chart, going ahead the stock has resistance @430 which if surpassed will open the way for 500 in long term while support comes at 385-364.

Source : Equity Bulls

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