Buy Tata Steel - Near-term outlook weak; fundamentals intact - PINC Result Review

Near-term outlook weak; fundamentals intact

Tata Steel's consol. EBITDA increased ~10x YoY to Rs37bn, mainly on improved performance at Tata Steel Europe (TSE). TSE posted an EBITDA/tonne of USD56 vs. loss of USD99 in Q2FY10, despite lower volume due to sale of TCP. Adj. PAT improved to Rs13.8bn vs. loss of Rs18.0bn in Q2FY10. Reported PAT was higher at Rs19.8bn due to Rs6.3bn gain on sale of investments.

Cash and Debt: Consol. debt of USD12.4bn and cash of USD1.7bn; approved to raise upto Rs70bn by way of equity (Common/DVR).

OUTLOOK

Although commodities remain volatile due to QE2 impact and rate tightening measures in China, we expect Tata Steel India to benefit in H2FY11 from better demand and lower RM prices. However, Q3FY11 outlook for TSE is subdued on weak demand in Europe and higher cost (peak RM cost still coming through). We expect this situation to improve Q4FY11 onwards with improved market conditions, even though volatile RM prices remain cause for concern. We revise our FY11 and FY12 EPS estimates to Rs63.7 (Rs57.9) and Rs74.4 (Rs75.2) respectively, to reflect improved domestic metals outlook. We estimate TSE' EBITDA/t at USD56 and USD71 for FY11 and FY12 respectively.

VALUATIONS AND RECOMMENDATION

Although we expect weak Q3FY11 performance for TSE, we believe profitability to improve FY12 onwards on commencement of RM integration. Highly profitable Indian operations, better demand outlook, and volume growth led by 2.9mntpa capacity gives further confidence. At CMP of Rs606 the stock is attractively valued at 4.8x FY12E EV/EBITDA. Maintain 'BUY' with a target price of Rs759.

Source : Equity Bulls

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