31 March 2016 Update Sector: Metals Tata Steel BSE SENSEX S&P CNX 25,342 7,738 Stock Info Bloomberg TATA IN Equity Shares (m) 971.2 52-Week Range (INR) 384/200 1, 6, 12 Rel. Per (%) 18/54/10 M.Cap. (INR b) 310.3 M.Cap. (USD b) 4.7 Avg Val ( INRm) 1,854.7 Free float (%) 68.7 Financials Snapshot (INR b) Y/E Mar 2016E 2017E 2018E Sales 1,193 1,330 1,432 EBITDA 65 125 171 Adj. PAT -4-8 28 EPS (INR) -4.1-8.1 29.1 EPS Gr(%) -2447 98.3-457.4 BV/Sh. INR 187 168 187 RoE (%) -2.2-4.6 16.4 RoCE (%) 4.3 4.8 8.1 P/E (x) -75.3-38.0 10.6 P/BV (x) 1.7 1.8 1.7 Shareholding pattern (%) As On Dec-15 Sep-15 Dec-14 Promoter 31.4 31.4 31.4 DII 26.8 25.9 25.4 FII 12.0 13.8 19.1 Others 29.9 28.9 24.1 FII Includes depository receipts Stock Performance (1-year) 420 360 300 240 Tata Steel Sensex - Rebased CMP: INR320 TP: INR164(-49%) Sell Intending to exit UK execution is key! Market already pricing in all positives, in our view Board decides against further investment in UK Tata Steel (TATA) has announced that its Board has decided against further investment in Tata Steel UK (TSUK), given its high cost operations and deterioration in long-term business outlook. Though delayed, it is a welcome move, in our opinion. The Board would like to divest the asset in whole or in parts. Selling TSUK will be an uphill task The question is: Are these assets saleable, knowing that they have been burning GBP247m-460m (USD400m-740m) every year in capex and EBITDA losses (exhibit 1) over FY12-15? The situation has worsened further in FY16. It could be an uphill task to sell them. Shutting TSUK the only option; will mean another USD1b cash burn The only way out is to shut down TSUK, in our view. But this too is not an easy option. There are a number of exit costs involved. The redundancy cost itself would be USD350m-400m. In addition, there would be costs related to (a) disposal of assets in an environmental friendly manner, and (b) gaps in pensions. The total bill of shutting down might be USD500m-1b. We believe TATA would take its time to reach this decision, given the redundancies. Hence, the actual damage to equity value could be even higher. Market already pricing in all positives two years in advance Let us assume TATA is able to exit TSUK within 12 months. This would result in (a) USD200m-300m reduction in EBITDA loss, (b) volume loss of 7-7.5mt, and (c) capex reduction of ~USD250m. The remaining TSE and SEA could generate EBITDA of ~USD500m (INR33b-34b) in FY18. The Indian business could generate EBITDA of INR140b, assuming improvement in EBITDA/ton from INR6,172 in 3QFY16 to INR10,916 in FY18, driven by cost reduction initiatives and improvement in steel prices. Indian volumes are expected to increase from 9.4mt in FY16 to 12.4mt in FY18. Consolidated EBITDA is expected to be INR170b-174b in FY18. The stock currently trades at an EV of INR110b (including net debt of INR806b), implying an EV/EBITDA of 6.3x. In other words, the market is already pricing in all the positives two years in advance. 180 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Maintain Sell We are cutting FY17E capex by 35% to INR66b. This is still not enough to pull equity value out of the red in FY17E. We continue to value the stock at INR164 (1x adjusted BV). Maintain Sell. Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 3982 5412 Dhruv Muchhal (Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/institutional-equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
TSUK has been burning GBP247m-460m (USD400m- 740m) every year in capex and EBITDA losses (exhibit 1) over FY12-15. The situation has worsened further in FY16 Exhibit 1: Tata Steel UK 84-202 -258 EBITDA -140-321 Capex -56-191 -170-162 FY11 FY12 FY13 FY14 FY15 Source: MOSL, TSUK annual Reports Exhibit 2: Difference in European business EBITDA as reported in Indian GAAP and UK (IFRS) GBP m Indian GAAP IFRS 435 313 221 279 143 64 89 43 FY12 FY13 FY14 FY15 Source: MOSL, Company Exhibit 3: India business EBITDA and sales volume 450 400 350 300 250 200 150 3.3 3.5 3.6 4.0 4.0 EBITDA per ton (USD) 3.9 4.4 4.8 4.8 5.2 6.2 Sales (m tons) 8.5 8.7 7.5 6.4 6.6 9.4 11.2 12.4 14.0 12.0 10.0 8.0 6.0 4.0 100 50 0 127 88 108 163 183 305 275 296 384 329 295 363 347 263 234 186 111 152 158 2.0 0.0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Source: MOSL, Company 31 March 2016 2
Exhibit 4: International business (non-india) business EBITDA and volumes 110 26.9 EBITDA per ton (US$) Sales (m tons) 32.0 US$/ton 70 30-10 23.3 18.2 98 84-11 17.1 17.6 16.7 18.0 17.6 16.8 17.4 17.6 51 10 11 33 26 6 22-5 24.0 16.0 8.0 Sales (m tons) -50 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E Source: MOSL, Company Exhibit 5: Target price calculations based on P/BV multiple 2016E 2017E 2018E Adjusted BV/share (INR)* 186.4 164.8 179.9 RoE (on adj. BV) % -2.6-6.3 14.9 P/BV multiple (x) 1.0 1.0 1.0 Target Price (INR/share) 186 164 179 Source: MOSL 31 March 2016 3
Financials and Valuations Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 1,187,531 1,328,997 1,347,115 1,486,136 1,395,037 1,193,086 1,329,647 1,431,709 Change (%) 16.0 11.9 1.4 10.3-6.1-14.5 11.4 7.7 EBITDA 159,956 124,168 123,212 164,110 127,758 65,296 125,479 170,841 EBITDA Margin (%) 13.5 9.3 9.1 11.0 9.2 5.5 9.4 11.9 Depreciation 44,148 45,167 55,753 58,412 59,436 52,972 72,325 74,665 EBIT 115,808 79,001 67,459 105,698 68,322 12,324 53,154 96,176 Interest 27,700 42,501 39,681 43,368 48,478 41,668 50,731 51,974 Other Income 2,809 15,730 4,792 5,168 7,962 39,225 5,361 5,301 Extraordinary items 30,103 33,619-73,899-1,418 16,615-12,553 0 0 PBT 121,020 85,850-41,330 66,080 44,421-2,673 7,785 49,503 Tax 32,459 36,365 32,294 30,582 23,380 13,155 15,333 20,765 Tax Rate (%) 26.8 42.4-78.1 46.3 52.6-492.2 197.0 41.9 Min. Int. & Assoc. Share -603-1,731-2,145-80 -450-590 -534-373 Reported PAT 89,827 51,673-72,375 33,062 19,391-16,542-7,907 28,255 Adjusted PAT 59,724 18,054 1,524 34,479 2,776-3,988-7,907 28,255 Change (%) -823.5-69.8-91.6 2,162.2-91.9-243.7 98.3-457.4 Balance Sheet (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Share Capital 9,587 9,714 9,714 9,714 9,714 9,714 9,714 9,714 Reserves 346,226 416,623 332,008 395,606 303,780 306,070 287,955 305,965 Net Worth 355,814 426,337 341,722 405,320 313,494 315,784 297,669 315,679 Minority Interest 8,889 10,912 16,694 17,377 17,039 16,449 15,915 15,542 Debt 634,184 643,029 702,707 837,805 828,887 884,560 904,560 904,560 Deferred Tax 20,126 24,424 31,185 25,550 28,618 29,413 29,979 30,745 Total Capital Employed 1,019,013 1,104,701 1,092,308 1,286,052 1,188,037 1,246,205 1,248,122 1,266,526 Gross Fixed Assets 981,023 1,133,047 1,352,650 1,570,087 1,520,384 1,829,202 1,956,002 1,996,702 Less: Acc Depreciation 615,338 712,043 798,379 969,844 965,176 1,018,148 1,090,473 1,165,138 Net Fixed Assets 365,685 421,003 554,271 600,242 555,208 811,054 865,529 831,564 Goodwill on consolidation 152,982 173,546 130,650 157,488 134,075 134,075 134,075 134,075 Capital WIP 135,508 200,280 137,862 259,564 278,502 105,502 45,502 45,502 Investments 46,881 26,229 24,974 24,251 20,804 20,804 20,804 20,804 Current Assets 652,071 646,849 620,943 674,492 600,639 554,037 580,933 647,843 Inventory 240,552 255,980 240,912 268,800 251,499 196,124 218,572 235,349 Debtors 148,119 148,785 139,940 160,058 133,099 130,749 145,715 156,900 Cash & Bank 140,183 121,972 106,200 112,729 101,246 112,368 101,851 140,798 Loans & Adv, Others 123,216 120,112 133,892 132,906 114,796 114,796 114,796 114,796 Curr Liabs & Provns 334,114 363,205 376,391 429,985 401,191 379,266 398,721 413,262 Net Current Assets 317,957 283,644 244,552 244,508 199,448 174,771 182,212 234,581 Total Assets 1,019,013 1,104,701 1,092,308 1,286,052 1,188,037 1,246,205 1,248,122 1,266,526 31 March 2016 4
Financials and Valuations Ratios Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Basic (INR) EPS 62.3 18.6 1.6 35.5 2.9-4.1-8.1 29.1 Cash EPS 138.3 97.4-18.4 96.7 82.8 38.2 66.7 106.4 Book Value 211.4 260.2 217.3 255.1 184.7 187.1 168.4 186.9 DPS 12.0 12.0 8.0 8.0 8.0 8.0 8.0 8.0 Payout (incl. Div. Tax.) 21.9 74.6 886.5 39.2 486.8-367.1-185.2 51.8 Valuation(x) P/E 8.7 108.1-75.3-38.0 10.6 Cash P/E 3.2 3.7 8.1 4.6 2.9 Price / Book Value 1.2 1.7 1.7 1.8 1.7 EV/Sales 0.7 0.7 0.9 0.8 0.7 EV/EBITDA 6.2 8.0 16.4 8.8 6.2 Dividend Yield (%) 2.6 2.6 2.6 2.6 2.6 Profitability Ratios (%) RoE 40.5 7.9 0.7 15.0 1.3-2.2-4.6 16.4 RoCE 13.2 9.2 6.7 9.3 6.1 4.3 4.8 8.1 Turnover Ratios (%) Asset Turnover (x) 1.2 1.2 1.2 1.2 1.2 1.0 1.1 1.1 Debtors (No. of Days) 46 41 38 39 35 40 40 40 Inventory (No. of Days) 74 70 65 66 66 60 60 60 Creditors (No. of Days) 53 50 54 56 50 52 52 52 Leverage Ratios (%) Net Debt/Equity (x) 2.4 2.1 2.8 2.9 4.1 4.2 4.9 4.2 Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Adjusted EBITDA 159,956 124,168 123,212 164,110 127,758 65,296 125,479 170,841 Non cash opr. exp (inc) 8,773 13,603 4,424 10,172 11,797 0 0 0 (Inc)/Dec in Wkg. Cap. -71,749 11,590 31,293-12,696 3,514 35,800-17,959-13,422 Tax Paid -32,351-36,524-25,690-30,127-24,270-12,360-14,768-19,999 Other operating activities 0 0 0 0 0-12,553 0 0 CF from Op. Activity 64,629 112,838 133,239 131,459 118,798 76,183 92,752 137,421 (Inc)/Dec in FA & CWIP -104,160-121,360-154,715-164,201-134,924-102,798-66,800-40,700 Free cash flows -39,531-8,523-21,476-32,742-16,126-26,615 25,952 96,721 (Pur)/Sale of Invt 17,505 78,503 29,484-3,829 48,404 31,281 0 0 Others 49,402-5,149-3,333 32,954-17,590 39,225 5,361 5,301 CF from Inv. Activity -37,254-48,006-128,564-135,075-104,109-32,292-61,439-35,399 Inc/(Dec) in Net Worth 45,568 6,045 2,646 156 167 0 0 0 Inc / (Dec) in Debt 37,874-39,803 25,153 58,658 42,119 20,000 20,000 0 Interest Paid -31,366-37,646-34,657-39,424-56,938-43,466-52,529-53,773 Divd Paid (incl Tax) & Others -7,146-11,639-13,590-9,244-11,520-9,302-9,302-9,302 CF from Fin. Activity 44,930-83,043-20,448 10,146-26,172-32,768-41,831-63,075 Inc/(Dec) in Cash 72,305-18,212-15,772 6,529-11,483 11,123-10,517 38,947 Add: Opening Balance 67,878 140,183 121,972 106,200 112,729 101,246 112,368 101,851 Closing Balance 140,183 121,972 106,200 112,729 101,246 112,368 101,851 140,798 31 March 2016 5
TATA STEEL METALS GALLERY JSW Steel SAIL Jindal Steel & Power Sector Updates
N O T E S 31 March 2016 7
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