Angel Broking recommends Accumulate with a Target Price of Rs 442 (12 months)

We met the Management of Tata Steel to get an update on the company's existing business and upcoming Odisha expansion. The key takeaways from our interaction are:

Focus on domestic market to continue: The Management stated that it aims to sell incremental sales volumes from Jamshedpur expansion mainly in the domestic market. This is unlike other flat steel producers such as JSW Steel and Essar Steel who have been opportunistically raising exports, considering INR depreciation against the USD alongside low domestic demand.

Odisha expansion to be complete by FY2015: The upcoming 3mtpa Kalinganagar steel plant in Odisha is likely to be completed by end of FY2015; however, there is no clarity on clearances of regulatory hurdles of iron ore mines which will be required to feed the blast furnaces. We believe timely clearance for expansion of iron ore mine is critical for the plant. The company aims to make value added steel products at the new facility in Odisha where the blended realizations could be potentially higher than existing products.

Staff costs/tonne for Odisha plant to be lower vis-à-vis Jamshedpur plant: The company's Odisha plant is highly automated and will require fewer employees/tonne compared to its Jamshedpur facility.

Debt levels likely to rise: The company stated that the debt level is likely to increase as it draws debt for Odisha expansion. Substantial reduction in debt can only be seen after FY2015 unless the company delays 2nd phase of the Odisha expansion. The company has not drawn any debt for the project until September 2013. As on September 30, 2013, it has already incurred a capex of Rs. 12,600cr (Phase-I total capex is pegged at Rs. 25,000cr) on the project.

No clarity on divestment of non-core investments: Currently, there is no clarity on stake sale of non-core investments. However, the company's board may consider selling non-core investments to fund expansion plans / lower leverage levels. The market value of its quoted investments is over Rs. 7,000cr currently. Further, the company also has some non-core investments in unquoted entities.

Outlook and valuation: Over the past two quarters, Tata Steel has reported strong growth in volumes in the domestic operations despite weak demand. Also, its European operations have been broadly better than expectations over the past three quarters indicating some stability and predictability from its European operations. We maintain our positive stance on Tata Steel as its earnings growth is likely to be driven by a) higher sales volume in FY2014-15 on the back of 2.9mn tonne brownfield expansion project in Jamshedpur and b) steady improvement in profitability of European operations. We recommend Accumulate rating on the stock with a revised SOTP target price of Rs. 442.

Source : Equity Bulls

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