Tata Steel - Long-term bet; Buy - Anand Rathi

Results disappointed at the consolidated EBITDA level due to above estimated costs in India operations (on expanded capacity and weak product mix). India operations will, however, see costs tapering off due to expansion of coke capacity and operating leverage from 4QFY13e. European operations surprised positively with higher volumes and below expected losses, reflecting positive restructuring efforts. We retain Buy, considering volume visibility in India amidst weak demand.

India expansion giving higher volumes. India operations had incremental production from 3mtpa expanded capacity delivering 1.87mt (up 12.7% yoy). However, distribution capacity build-up saw sales volume lagging at 1.73 with 5% yoy growth. Management maintained its guidance of 1mt incremental volumes in FY13e, suggesting 4QFY13e will see stabilisation and operating leverage results.

Stabilisation takes a toll. EBITDA dropped to Rs.14.k/tn against average of Rs.16.4k/tn in past 26 quarters owing to: (1) purchased coke (negative impact of USD12/tn); (2) poor product mix (negative impact of US$29/tn); and (3), higher start-up costs for spares and maintenance and amortisation of CARS costs.

European operations deliver strong volumes. European operations surprised positively with volumes of 3.42mt with 7% QoQ growth in the weak environment and near breakeven at operating level. European operations have always weighed on the group profitability, but the restructuring efforts undertaken in the past are yielding positive results by inducing flexibility in the operations.

Valuation. At CMP, Tata Steel is trading at 5.9x EV/EBITDA and we value on SOTP basis at Rs.472. Risks. Sharp fall in iron ore prices.

Source : Equity Bulls

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