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Research
Accumulate Tata Steel - Tougher times ahead - Elara Capital
Posted On : 2010-08-12 22:03:25( TIMEZONE : IST )
- Tata Steel
- Rating : Accumulate
- Target Price : INR555
- Upside : 7%
- CMP : INR520 (as on 12 August 2010)
Indications to strong margin pressures
Tata Steel's Q1FY11 revenues increased 16.0% YoY on the back of higher realizations and volume sales. The EBITDA for the quarter increased 3.2% QoQ to INR42.5bn as higher volume sales offset increased cost pressures. Although, the company reported larger consolidated volume sales, domestic volume decreased 18% QoQ due to challenging market conditions. The consolidated EBITDA margins for the quarter improved to 15.7% in Q1FY11 as compared to an operating loss in Q1FY10 and 15.3% in Q4FY10. Despite lower interest expenses, PAT for the quarter declined 33% QoQ to INR18.9bn as a result of the upper tax outgo.
Highlights of the quarter
- Consolidated volume sales stood at 6.05mn tonnes, representing a 13% YoY growth. However, the domestic volume decreased to 1.4mn tonnes in Q1FY11 as compared to 1.42mnt in Q1FY10.
- Domestic realizations for Q1FY11 stood at INR42,871/tonne as compared to INR39,616 in Q4FY10 and INR36,717 in Q1FY10. Realizations for the consolidated entity improved 11.8% YoY and 8.1% QoQ to INR 48,745/tonne.
- Consolidated EBITDA/tonne for the quarter stood at INR6,820 in Q1FY11. Corus reported an EBITDA/tonne of ~USD80.
Valuations & recommendation
We believe, going ahead, margins for the steel players would be under pressure as a result of sluggish realizations and rising raw material costs. Although capacity utilization levels across the globe have been reviving, rising exports from China remain a worry. Chinese exports rose in excess of 250% (~5mn tonnes/month) consistently for the past two months (Apr & May'10). Hence, we believe, companies would be unable to pass on the total hike in raw material costs, going ahead. We have factored in EBITDA/tonne of USD55 for Corus for FY12 (down from USD80/tonne currently). We maintain our Accumulate rating on Tata Steel with a target price of INR555.
