Accumulate Tata Steel - Caught between Europe and high costs - Elara Capital

• Rating : Accumulate
• Target Price : INR645
• Upside : 6%
• CMP : INR607 (as on 12 November 2010)

Caught between Europe and high costs

Going to get tougher

Tata Steel (Tata) reported a revenue growth of 10.6% YoY in its Q2FY11 results due to higher realizations though there was a marginal drop in volume sales. The EBITDA for the quarter improved significantly (up 738% YoY) to INR31,170mn. However, the same declined 26.6% sequentially on the back of higher cost pressures. Adjusted PAT for the quarter stood at INR19,998mn - an increase of 8.1% sequentially. Tata is planning to raise capital of up to INR70bn though the mode (e.g. ordinary equity or equity with differential voting rights etc) has not been yet decided by the management.

Highlights of the quarter

- Consolidated volume sales stood at 5.82mn tonnes, a decline of 3.8% YoY and 1.4% QoQ.
- Corus sales declined ~8.1% YoY and 4.9% QoQ indicating tougher times in the European markets. However, the volume sales in the domestic market recorded 14% YoY increase in Q2FY11.
- Consolidated EBITDA/tonne for the quarter stood at INR7,246 as compared to INR423 in Q2FY10 and INR6,993 in Q1FY11.
- Corus EBITDA/tonne declined to USD54 in Q2FY11 from USD80.4 in Q1FY11.

Valuation and recommendation

We believe, going ahead the European steel operations will continue to be under margin pressure on the back of flattish realizations and higher raw material costs. The capital raising exercise might ease out the financial leverage but the exact pricing and hence the dilution effect, is yet to be known. We have not factored in the same at this point of time and will do so once clarity regarding the same emerges. The stock is currently trading at 5.8x FY12E EV/EBITDA which is a marginal discount to its global as well as Indian peers. Hence, we recommend 'Accumulate' rating on the stock with a marginally reduced target price of INR645.

Source : Equity Bulls

Keywords