Buy Tata Steel - Embarking on new earnings growth path - Motilal Oswal

Tata Steel (TATA IN; Mkt Cap USD14.4b, CMP Rs703, Buy)

Embarking on new earnings growth path; upgrade to Buy

Tata Steel will embark upon a new earnings growth path, with expansion of capacity from 6.8mtpa to 10mtpa at Jamshedpur, start of coking coal production at Benga project, Mozambique, and start of iron ore production at DSO, Canada over 12-15 months.

Sale of Teesside Cast Products' slab plant for nearly USD500m will help deleverage the balance sheet and reduce earnings volatility for Europe operations.

Tata Steel's focus is now shifting towards high RoE projects rather than pure strategic investments. It has sold ~Rs12b of its investments in group companies.

Steel prices have recovered by 10-15% across the world over the past month due to end of de-stocking, supply correction, and raw material cost pressures.

Demand is likely to pick up over the next couple of months, as buyers return to the market post winter vacations in the western world.

We are introducing FY13 estimates and moving our target price to SOTP value of Rs1,017 (upside of 43%) to better reflect the value of its diverse assets across the globe. We have valued Indian operations at EV/EBITDA of 6.5x, TSE at EV/EBITDA of 5x and investments at current market value. At our target price, the stock will trade at 10.1x FY13E EPS and an EV of 6.7x FY13E EBITDA. We upgrade the stock to Buy.

Source : Equity Bulls

Keywords