Tata Steel - Q3FY13 Result Update - Kotak

Q3 results surprised negatively - operational performance to improve substantially from Q4 onwards - Upgrade from Accumulate to BUY with TP of Rs436 (vs. Rs415 earlier)

- Tata Steel reported poor Q3 results as it missed already weak expectations for Q3. It reported consolidated loss of Rs7.63bn (our expectations of loss of Rs3.42bn) vs. Q2 consolidated loss of Rs3.64bn. Consolidated EBITDA declined 3.1% Q/Q to Rs22.39bn.

- Performance was weak both for India and Europe even as SE Asian operations improved. EBITDA/t at Indian operations declined 8.1% q/q to Rs13366 /t, which happens to be lowest levels in last 3 years.

- TS Europe reported a negative EBITDA of Rs4.28bn in Q3FY13 vs Q2FY13 EBITDA loss of Rs0.4bn and the EBITDA loss of Rs7.8bn in Q3 FY12. Deliveries totaled 3.02mt in Q3 FY13 compared to 3.42mt in Q2FY13 and 3.35mt in Q3 FY12. TS Europe reported EBITDA/t was -$25.8/t in Q3 vs. -$2.3/t in Q2

- Tata SE Asia operations reported Q3FY13 EBITDA was Rs1.44bn vs. Rs0.2bn in Q2FY13 and the EBITDA loss of Rs0.08bn in Q3FY12. Deliveries totaled 0.82mt in Q3 FY13 compared to 0.77mt in Q FY13 and 0.66mt in Q3FY12. EBITDA/t improved six fold Q/Q from $5.2/t to $31.7/t.

- Net debt at the end of Q3 stood at $10.55bn vs. S$8.67bn at the end of March 2012.

We see some silver lining amid bad results

- Sales volumes for Indian operations improved 9.2%Q/Q to highest ever levels of 1.89mt. Management guidance indicates levels of 2.2-2.3mt in Q4.

- With the restart of the No 4 blast furnace at Port Talbot from Feb 2013, it has regained its normal operational and logistical flexibility, enabling it to improve its sales volume performance and also likely help in improving margins.

- European industry macro is improving as we enter better seasonality. We are quite encouraged by improved steel, iron ore and coking coal prices at China over last few weeks.

Valuation

We have cut our estimates for FY13 and FY14 largely in backdrop of weak industry macro and lower than expected steel realizations at Indian operations. We now expect EPS of Rs10.7 for FY13e and Rs35.2 for FY14e. At the CMP of Rs 376, the stock is trading at 10.7xFY14 EPS and 6.3x FY14 EV/ EBITDA. We maintain our SOTP valuation methodology with revised estimates but increase valuation multiple for Indian operations from 6x to 6.5x earnings and arrive at a fair value for Tata Steel at Rs436/share. We upgrade the stock from ACCUMULATE to BUY.

Source : Equity Bulls

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