Tata Steel - Weak Q3, expect mild recovery ahead - Religare

TATA's Q3FY13 results were disappointing as Indian operations underperformed (reporting the lowest EBITDA/t in the past 12 quarters) on weak realisations and higher raw material cost, and European operation continued with its EBITDA losses. The consolidated entity reported a net loss yet again after a weak Q2FY13. However, despite near-term headwinds, BUY into the weakness as the share of higher-RoCE Indian business is slated to rise over FY13-15. Maintain BUY with a TP of Rs 440.

- Weak realisations affect Indian operations: Standalone revenues came in at Rs 92.7bn (+12% YoY, +3% QoQ) with sales realisations disappointing at Rs 49,038/t (-6% QoQ, -4% YoY) and sales volumes at 1.89mt (+17% YoY, +9% QoQ). Domestic EBITDA/t was at Rs 12,826/t (-19% YoY, -8% QoQ), the lowest in the past 12 quarters, further impacted by higher cost of imported coke.

- Volumes, profitability disappoint for Corus: TSE revenues were at $ 3.3bn (-15% YoY, -12% QoQ) with sales volume weak on subdued demand at 3.02mt (-10% YoY, -12% QoQ) and sales realisations at $ 1,092/t (-1% QoQ, -5% YoY). Profitability continued to disappoint with EBITDA/t of $ -26/t ($ -2/t in Q2FY13).

- Consolidated entity reports a net loss again: Consolidated EBITDA came in at Rs 22.4bn (+17% YoY, -3% QoQ) with South East Asian operations as the only outperformer. Post a weak Q2FY13, the consolidated entity reported a net loss of Rs -7.43bn (-23% YoY, -83% QoQ), significantly below street estimates, further aided by lower other income due to less liquid investment.

- Maintain BUY: We continue to like TATA as the share of higher-RoCE Indian business is slated to increase through FY13-FY15 and we expect Corus profitability to stabilise. Maintain BUY with a March'14 TP of Rs 440 6.5x FY14E EV/EBITDA.

Source : Equity Bulls

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