Tata Steel BUY. Performance Highlights. 3QFY2010 Result Update I Steel

Transcription

1 3QFY2010 Result Update I Steel January 29, 2010 Tata Steel Performance Highlights Tata Steel s standalone 3QFY2010 net revenue increased by 33.2% yoy and 12.0% qoq to Rs6,307.5cr, ahead of our estimates of Rs5,485cr. The outperformance is attributable to: 1) a 9.4% higher sales volume, and 2) a 5.2% higher blended realisation, as compared to our estimates. Net income grew by 155.6% yoy to Rs1,191.8cr, ahead of our estimates of Rs810cr on back of strong volume growth, lower cost and substantial jump in other income. Due to the delay of 3.2mn tonnes brownfield expansion, which is now expected to come on-stream by 2HCY11E (previous target date was 1HCY11E), we have revised our volume estimates downwards for FY2012E by 5.8%. We maintain a Buy on the stock. Margins expansion led by higher blended realisations and lower costs: 3QFY2010 net revenue increased by 33.2% yoy and 12.0% qoq to Rs6,307.5cr, ahead of our estimates of Rs5,485cr. The outperformance is attributable to: 1) a 9.4% higher sales volume, and 2) a 5.2% higher blended realisation, as compared to our estimates. Sales volume grew by 49% yoy and 9.6% qoq to 1.6mn tonnes. Despite the correction in steel prices during the quarter, blended realisation for the quarter increased by 2.2% qoq, due to a better product-mix, but declined by 10.6% yoy to Rs39,508/tonne. EBITDA grew by 48.0% yoy to Rs2,089.5cr, as EBITDA margins expanded by 332bp yoy to 33.1% on account of lower power and fuel costs, and other expenses. While interest expenses increased by 19.4% yoy to Rs415.7cr, the steep increase in other income from Rs8.5cr in 3QFY2009 to Rs263.6cr in 3QFY2010 led to a net income growth of 155.6% yoy to Rs1191.8cr, ahead of our estimates of Rs810cr. Outlook and Valuation: At the CMP of Rs569, the stock is trading at 7.1x FY2011E and 6.4x FY2012E EV/EBITDA. While we have revised our volume estimates for FY2010E and FY2011E upwards by 3.9% to 6.0mn tonnes and 6.8mn tonnes respectively, we have revised our volume estimates downwards for FY2012E by 5.8% to 7.2mn tonnes, due to the delay in the commissioning of the 3.0mn tonnes brownfield expansion to 2HCY2011E (previous target date was 1HCY2011E). We maintain a Buy on the stock, with a revised Target Price of Rs697 based on SOTP valuation. BUY CMP Rs569 Target Price Rs697 Investment Period 15 Months Stock Info Sector Steel Market Cap (Rs cr) 50,482 Beta WK High / Low 662/149 Avg. Daily Volume Face Value (Rs) 10 BSE Sensex 16,358 Nifty 4,882 Reuters Code TISC.BO Bloomberg Code Shareholding Pattern (%) Promoters 31.3 MF/Banks/Indian FIs 28.2 FII/NRIs/OCBs 19.7 Indian Public 20.8 Abs. (%) 3m 1yr 3yr Sensex Tata Steel Key Financials (Consolidated) Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Sales 145, , , ,012 % chg 11.1 (31.0) Net Profit 4,951 (390) 5,425 5,096 % chg (59.9) - - (6.1) EPS (Rs) 59.0 (4.4) OPM(%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Source: Company, Angel Research Paresh Jain Tel: Ext: pareshn.jain@angeltrade.com Please refer to important disclosures at the end of this report Sebi Registration No: INB

2 Exhibit 1: 3QFY2010 Performance (Standalone) Y/E March (Rs Cr) 3QFY10 3QFY09 % chg 9MFY10 9MFY09 % chg Net Sales 6, , , ,673.6 (1.0) Consumption of Raw Material 1, , , , (% of Net Sales) Power& Fuel (% of Net Sales) Staff Costs ,681 1, (% of Net Sales) Freight & Handling (% of Net Sales) Other expenses 1, , , , (% of Net Sales) Total Expenditure 4, , , , Operating Profits 2, , , ,553.4 (25.5) OPM (%) Interest , Depreciation Other Income +Operating Income Exceptional Items - (126.8) - (775.6) Profit before Tax 1, , ,607.3 (23.6) (% of Net Sales) Tax , ,864.8 (24.9) (% of PBT) Profit after Tax 1, , ,742.5 (22.9) EPS (25.3) Source: Company, Angel Research Exhibit 2: Operating matrix (Standalone) (Rs/tonne of 3QFY10 3QFY09 % chg yoy 2QFY10 % chg qoq saleable steel) Revenue 39,508 44,184 (10.6) 38, Cost 26,420 31,015 (14.8) 25, Raw material cost 9,547 9,967 (4.2) 9,759 (2.2) Power and Fuel 1,899 2,459 (22.8) 2,045 (7.1) Staff cost 4,086 5,307 (23.0) 3, Freight cost 2,243 2,447 (8.3) 2, Other Expenditure 8,646 10,835 (20.2) 8, EBITDA (Rs) 13,088 13,169 (0.6) 12, EBITDA (USD) Source: Company, Angel Research January 29,

3 Net revenue led by strong volume growth and higher realisation 3QFY2010 net revenue increased by 33.2% yoy and 12.0% qoq to Rs6,307.5cr, ahead of our estimates of Rs5,485cr. The outperformance is attributable to: 1) a 9.4% higher sales volume, and 2) a 5.2% higher blended realisation, as compared to our estimates. Sales volume grew by 49% yoy and 9.6% qoq to 1.6mn tonnes. Flat and long product sales stood at 0.9mn tonnes and 0.7mn tonnes respectively. Despite the correction in steel prices during the quarter, blended realisation for the quarter increased by 2.2% qoq, due to a better product-mix, but declined by 10.6% yoy to Rs39,508/tonne. On the back of the improvement seen in stainless steel production, the company s ferro segment witnessed a turnaround during the quarter (due to higher ferro chrome prices). Lower costs lead to margin expansion of 332bp EBITDA grew by 48.0% yoy to Rs2,089.5cr, as EBITDA margins expanded by 332bp yoy, on account of the following factors: Raw material cost per tonne has declined by 2.2% qoq and 4.2% yoy to Rs9,547/tonne, as the impact of low-priced coking cost kicks in. Average cost of coking coal for the quarter was $160/tonne. Negative impact of higher royalty on iron ore was to the tune of Rs30cr. Power and fuel cost declined by 7.1% qoq and 22.8% to Rs1,899/tonne. Freight cost declined by 8.3% yoy and increased by 6.2% qoq to Rs2,243/tonne. Other expenses declined by 20.2% yoy to Rs8,646/tonne, but increased on a sequential basis by 3.2% qoq. The sequential increase in other expense is due to the inclusion of a one-time amortization charge of Rs185cr. Excluding this, other expenses declined by 30.9% yoy and 10.6% qoq to Rs7,487/tonne. On the negative side, salary cost increased by 14.7% yoy and 24.9% qoq to Rs652cr which included a one-time provision of Rs95cr due to revision in wage agreement. Substantial jump in other income aids the net profit growth Interest expenses increased by 19.4% yoy to Rs415.7cr and the tax rate for the quarter stood at 31.6% as against 38.7% in the corresponding period last year. The steep increase in other income from Rs8.5cr in 3QFY2009 to Rs263.6cr in 3QFY2010 was on account of: 1) Rs80cr received from the sale of the investment in Tata Motors, b) Rs150cr of dividends received from subsidiaries. Consequently, net income grew by 155.6% yoy to Rs1,191.8cr, ahead of our estimates of Rs810cr. Adjusted for the increase in other income, the net income came in at Rs961cr. January 29,

4 Outlook on steel prices Towards the end of December, 2009, domestic steel producers hiked steel prices by up to Rs2,000/tonne on the strong demand recovery. Currently, the world steel capacity utilisation level is around 76%. Steel utilisation rates are likely to increase in the case that apparent demand exceeds the current expectations of a 9.6% growth in CY2010E. Thus, we believe that there is a marginal upside left for the prices to inch up further. On the other hand, a downside in steel prices is limited, on account of increasing raw material prices. Consequently, prices are expected to be volatile due to speculative activity (raw material negotiations, temporary demand-supply mismatch and government intervention), and are expected to consolidate around the current levels in CY2010E. Over the last 10 years, steel cycles have followed a specific pattern: a short up-tick followed by consolidation, followed by a sharp up-move, and then a steep fall. After May 2009, world average HRC steel prices have recovered by 26%. Following this short up-move in prices, we expect prices to fluctuate in a band of US $ /tonne. Exhibit 3: Prices expected to consolidate in CY2010E 1200 (US $/tonne) % in 12mths 30% in 5mths Consolidation for 13 mths 27% in 16 mths 58% in 9 mths 104% in 14mths 26% in 5mths 200 Consolidation for 7 mths 56% in 13mths 0 Jan-01 Apr-02 Jul-03 Oct-04 Jan-06 Apr-07 Jul-08 Oct-09 Source: Bloomberg, Angel Research Valuation At the CMP of Rs569, the stock is trading at 7.1x FY2011E and 6.4x FY2012E EV/EBITDA. While we have revised our volume estimates for FY2010E and FY2011E upwards by 3.9% to 6.0mn tonnes and 6.8mn tonnes respectively, we have revised our volume estimates downwards for FY2012E by 5.8% to 7.2mn tonnes, due to the delay in the commissioning of the 3.0mn tonnes brownfield expansion to 2HCY2011E (previous target date was 1HCY2011E). We maintain a Buy on the stock, with a revised Target Price of Rs697 based on SOTP valuation. Key risks to our call: 1) Further delay in expansion projects, 2) Government intervention to curtail steel price increases, and 3) Slowdown in economic activity outlook. January 29,

5 Exhibit 4: 1-year forward EV/EBITDA 1,800,000 1,600,000 1,400,000 (Rs mn) 1,200,000 1,000, , , , ,000 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 10x 8x 6x 4x 2x Source: Bloomberg, Angel Research Exhibit 5: 1-year forward P/BV band (Rs) 1, Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 2x 1.4x 0.8x 0.2x Source: Bloomberg, Angel Research January 29,

6 Research Team Tel: Website: ww.angeltrade.com DISCLAIMER This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions - futures, options and other derivatives as well as non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Angel Securities, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent Angel Securities and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Angel Securities Limited and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. Angel Securities Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Note: Please refer important `Stock Holding Disclosure' report on Angel web-site (Research Section). Disclosure of Interest Statement Tata Steel 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 5 lakh for Angel, its Group companies and Directors. Address: Acme Plaza, A Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai Tel: (022) / Angel Broking Ltd: BSE Sebi Regn No : INB / CDSL Regn No: IN - DP - CDSL / PMS Regn Code: PM/INP Angel Securities Ltd:BSE: INB /INF NSE: INB /INF Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB / NSE FNO: INF / NSE Member code Angel Commodities Broking (P) Ltd: MCX Member ID: / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID / FMC Regn No: NCDEX / TCM / CORP / 0302 January 29,