Maintain Buy on Tata Steel - Motilal Oswal

TATA STEEL: 3QFY11 sales volumes in-line; FPO of 57m shares will dilute EPS 2-3%; Maintain Buy

Tata Steel 3QFY11 Tata Steel India (TSI) sales volumes increased 2.6% YoY to 1.637m tons (-1.4% QoQ), in line with our estimates of 1.67m tons.

Production during 3QFY11 was 1.75m tons. Pricing environment was mixed in 3QFY11, with prices of longs improved while prices of flat products declined.

Tata Steel Europe (TSE) deliveries declined 8% YoY to 3.5m tons. Higher raw material prices and reduced demand adversely affected margins at TSE.

Volumes from SE Asian operation also declined 2% QoQ. Margins got impacted due to higher scrap prices and lag in increase in finished product prices.

An incident of fire occurred in one of TSE's pickling lines without causing any loss of manpower. Deliveries are expected to be met from alternative facilities.

Tata Steel announced a capital raise of 57m shares at a price to be determined through book building process. At CMP of Rs647, it can raise ~Rs37b from the issue. Assuming raised funds will replace high cost debt (~10%), the FY12 EPS will get diluted by 2% to Rs73.5 and FY13 EPS will get diluted by 3% to Rs97.2. We remain positive on the earnings outlook for the company as Tata steel will deliver both volume and margins expansion over next 2-3 years. Stock trades at PE of 8.6x FY12 earnings, 6.5x FY13 earnings, 6.2x FY12 EV/EBITDA and 4.9x FY13 EV/EBITDA. Maintain Buy

Source : Equity Bulls

Keywords