Maintain Buy on Tata Sponge - Motilal Oswal

TATA SPONGE 3QFY11: In-line; Biggest beneficiary of strong sponge iron prices; Buy

Tata Sponge's 3QFY11 adjusted PAT declined 10% QoQ to Rs222m (up 9% YoY) due to higher tax payment; however on full year basis, tax rate is in-line.

Net Sales declined 3% QoQ to Rs1.7b due to lower volumes. Sponge sales volumes declined 15% QoQ at 91,500 tons while avg realization was up 17% QoQ.

EBITDA increased 15% QoQ to Rs349m as costs remained flat. EBITDA per ton increased 36% QoQ to Rs3,810/ton (~US$85/ton).

Company is planning to add another 25MW of captive power plant at existing location, which will use unburnt coal from sponge iron kiln.

We expect strong growth in 4QFY11 earnings due to strong sponge iron prices (currently prices are at ~Rs21,000/ton vs avg of Rs18,142/ton in 3QFY11). Tata sponge is better placed due to secured iron ore supply & long term pricing arrangement while competition is struggling to secure iron ore supply due to closure of many iron ore mines in the Barbil Region and volatility in prices. Stock trades at attractive EV/EBITDA of 2.2x FY12 and PE of 5.6x FY12. Maintain Buy.

Source : Equity Bulls

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