Accumulate Tata Steel - Elara Capital

• Rating : Accumulate
• Target Price : INR550
• Upside : 13%
• CMP : INR487 (as on 26 May 2010)

Corus turnaround drives performance

Cost savings in Corus, Indian operations steer the show

Tata Steel (Tata) reported a strong consolidated performance in Q4FY10 largely on the back of a turnaround in Corus operations. Although Q4FY10 consolidated revenues were flat, the cost saving initiatives in Corus and strong performance in the Indian operations bode well for EBITDA growth of 39.5% YoY. For the full year FY10, the EBITDA declined 27% and the adjusted attributable PAT declined 104% largely on the back of subdued performance of Corus in the first half of FY10.

Operational performance snapshot

Deliveries for the full year declined 14.7% to 24.3mn tonnes in FY10 on the back of slowdown in the European operations. The realizations for the year stood at INR 44,395/tonne as compared to INR 52,416/tonne in FY09. The EBITDA per tonne was INR3,164 in FY10 against INR5,816 in FY09. During the quarter under review, Corus reported a strong volume growth (3.9mn tonnes) of 11% YoY and 2.6% QoQ. Although realizations for Corus were flat QoQ at USD952/tonne (against USD 941/tonne in Q3FY10), the EBITDA per tonne increased to USD91.5/tonne as compared to USD37.1/tonne in Q3FY10. The management has sited cost saving initiatives during the quarter to the tune of USD1.5bn as the primary reason for improvement in EBITDA.

Maintain ACCUMULATE with a changed target price of INR550

Although Corus has reported a strong performance, we believe the prospects depend largely on its ability to pass on the raw material cost push to final consumers. Although Indian operations are expected to do well on the back of a higher degree of integration and capacity additions, we believe the higher debt on the balance sheet and the uncertainty in the European business will drag the overall performance. We maintain our ACCUMULATE rating on the stock with a revised target price of INR550.

Source : Equity Bulls

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