Buy Tata Steel Ltd

CMP: Rs 538.40
Target Price Rs 740

Net sales has increased by 32.8% & 12.0% on y-o-y & q-o-q basis respectively to Rs 63,749mn in Q3FY10 due to higher sales volume. Sales volume has increased by 48.9% & 9.6% on y-o-y & q-o-q basis respectively to 1.6mn MT in Q3FY10. Blended steel realizations has fallen by 12.3% y-o-y to Rs 36,545/MT, but has increased by 2.5% q-o-q – the q-o-q increase in realizations was the positve from the result. In line with the q-o-q improvement in realization, EBIDTA/MT (steel business) has increased from Rs12,961/MT during Q2FY10 to Rs13,934/MT during Q3FY10. Adjusted PAT has increased by 69.8% & 11.5% on y-o-y & q-o-q basis respectively to Rs 10,068mn during Q3FY10. Tata Steel Ltd – Standalone (TSL) has a gross debt of Rs 265bn & cash of Rs 45bn. In India, most of the steel producers announced price hikes of Rs 1,500-2,000/MT from Jan’2010 onwards. Going ahead we do not expect downside in steel prices from current levels. We are positive on the improving global steel demand scenario, increasing capacity utilization at Corus & a stable steel pricing scenario. We maintain our ‘BUY’ rating with a target price of Rs 740, a 28.2% upside.

Q-o-q increase in realization & EBIDTA/MT
The key positive of the result was the q-o-q increase in steel realization from Rs 35,652/MT during Q2FY10 to Rs 36,545/MT during Q3FY10 – an increase of 2.5%. The increase in steel realization led to a 0.52% q-o-q increase in EBIDTA/MT (steel business) to Rs36,545 during Q3FY10. Adjusted net profit has increased by 69.8% & 11.5% on y-o-y & q-o-q basis respectively to Rs 10,068mn during Q3FY10 after adjusting for extra ordinary income of Rs 1,850mn on account of conversion of CARS into FCCB during Q3FY10 and exceptional forex loss of Rs 1,268mn during Q3FY09.

The brownfield expansion at Jamshedpur is expected to be completed by July’2011
TSL is undertaking a 3mn MT brownfield expansion project at Jamdhedpur, which would increase the Indian crude steel capacity from 6.8mn MT to 9.8mn MT by July 2011. Full ramp up of the 3mn MT blast furnace would start only in another 5 months, i.e. during Q4FY11E – hence the full benefit of the expanded 3mn MT capacity would accrue only during FY13E.

Comfortable liquidity and debt position on standalone basis
TSL had a gross debt of Rs 265bn & cash of Rs 45bn as on 31st December 2009, implying a net debt to Rs 220bn. Net debt has decreased by Rs 16-18bn from September 2009, due to debt prepayment. TSL intends to prepay additional debt of Rs 16-18bn during Q4FY10. Stability in steel prices, maintain BUY rating TSI’s steel realizations increased by 2.5% q-o-q to Rs 36,545/MT during Q3FY10, which is expected to increase during Q4FY10 (TSI hiked steel prices by Rs1500/MT during January 2010). Recent improvement in steel prices are mainly attributable to increased raw material prices of iron ore and coking coal and an improvement in the global steel demand scenario. TSI which is fully integrated for its iron ore requirement and is 60% integrated for its coking coal requirement, will be the largest beneficiary of any increase in steel prices. We maintain our BUY rating, with a price target of Rs740.

Standalone results – Q3FY10 v/s Q3FY09

• Net sales has increased by 32.8% y-o-y to Rs 63,749mn in Q3FY10 due to higher sales volume. Steel sales volume has increased by 48.9% y-o-y to 1.6mn MT in Q3FY10. Blended steel realizations has fallen by 12.3% y-o-y to Rs 36,545/MT in Q3FY10.

• EBITDA margins has improved by 305bps from 30.78% in Q3FY09 to 33.83% in Q3FY10 mainly due to lower raw material cost.

• Reported net profit has increased by 155.6% y-o-y to Rs 11,918mn in Q3FY10. Adjusted net profit has increased by 69.8% y-o-y to Rs 10,068mn in Q3FY10 after adjusting for extra ordinary other income of Rs 1,850mn on account of conversion of CARS into FCCB during Q3FY10 and exceptional forex loss of Rs 1,268mn during Q3FY09.

Standalone results – Q3FY10 v/s Q2FY10

• Net sales has increased by 12.0% q-o-q to Rs 63,749mn in Q3FY10 due to higher sales volume and realizations. Steel sales volume has increased by 9.6% q-o-q to 1.6mn MT in Q3FY10.

Blended steel realizations has increased by 2.5% q-o-q to Rs 36,545/MT in Q3FY10.

• EBITDA margins has improved by 5 bps from 33.77% in Q2FY10 to 33.83% in Q3FY10 due to higher sales realizations.

• Reported net profit has increased by 32% q-o-q to Rs 11,918mn in Q3FY10. Adjusted net profit has increased by 11.5% q-o-q to Rs 10,068mn in Q3FY10 mainly due to higher sales realizations and higher sales volume.

Company Updates

• The Company has prepaid Rs 16-18bn of debt in Q3FY10. TSL expected to prepay further Rs 16-18bn during Q4FY10. Net debt as on December 31st, 2009, stood at Rs 220bn.

• Capex guidance is USD700mn during FY11 for the Indian operations.

• The Company has approved a framework for co-operation with Nippon Steel for the production and sales of automotive cold-rolled flat products at Jameshedpur to address the local needs of Indian automotive customers for high-grade cold rolled steel sheet. Tata Steel will hold 51% equity capital of the JV company, which will have a capacity of 600,000MT per annum. Both the companies will target conclusion of a joint venture agreement in 2010 and startup of operations in 2013.

Industry Updates

Global steel production data is showing signs of improvement
Global steel production has fallen by 8.3% y-o-y to 1.22bn MT in CY09, but is expected to grow by 9.2% to 1.33bn MT in CY10E. China played a key role during CY09, which led to a recovery in global steel prices. Steel production of China has increased by 12.7% y-o-y to 566mn MT in CY09 and it is expected to further increase by 5% in CY10E. Steel production in North America, Europe and Japan has fallen by 34.6%, 22.8% & 26.3% y-o-y to 81.9mn MT, 265.8mn MT & 87.5mn MT respectively in CY09. But the same is expected to increase by 17.1%, 12.4% & 15.8% respectively during CY10E. Global capacity utilization has improved from 58.1% in December, 2008 to 71.5% in December 2009. Before the financial crisis, global capacity utilization was 90%. In India, steel production in CY09 has increased by 2.1% y-o-y to 56.2mn MT and it is expected to increase by 12.1% in CY10E to 63.0mn MT.

Dumping threat of steel products from China has reduced significantly, as China’s consumption of domestically steel products has increased substantially. Export of steel products from China during CY09 has reduced by 60.7% y-o-y to 21.95mn MT, whereas import of steel products into China during CY09 has increased by 15.9% to 16.15mn MT. This shows that China’s apparent steel consumption has grown faster than its production in CY09, which is a good sign for the stability of steel prices in other parts of the world.

Steel prices in US, Europe and overall export market has increased during the last couple of weeks, wherein it is under pressure in China. Even in India, most of the steel producers increased steel prices by Rs 1500-2000/MT from Jan’10 for both long and flat steel products. But very recently spot market steel prices are under pressure in India. We expect prices of steel products to stabilize at these levels. Next year long term contract prices for iron ore and coking coal is expected to increase by 20-30% & 35-40% respectively.

Report card

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