Tata Steel: Cost contained; maintain buy
Tata Steel’s consolidated EBITDA of Rs31.8bn was higher than Edelweiss' estimate of Rs30.3bn, on the back of higher-than-expected blended realisation at India operations and low cost at international operations. EBITDA/t in European operations was broadly in line. 2.9mtpa Jamshedpur expansion is complete and management expects sales of 1mt from this project in FY13. Benga project in Mozambique too has commissioned, with first shipment expected in May 2012 (their estimates do not factor in benefits of the same). Edelweiss retain their estimates and maintain ‘BUY’ with TP of Rs563/share.
Indian operations: Higher realisation flow to EBITDA/t
Standalone EBITDA, at Rs29.9bn, was higher than their estimate of Rs28.7bn on the back of improved blended realisations that were up 4.9% q-o-q to USD1,065 vs their estimate of USD1,041. As a result, blended EBITDA/t too came in higher at USD336 vs their estimate of USD323, up 5.5% q-o-q. The 2.9mtpa Jamshedpur expansion is complete and company expects 1mt of additional volumes in FY13, 2.5 in FY14 and full capacity in FY15. Edelweiss have assumed 1mtpa in FY13 and 2.1mt in FY14 from this project.
International operations: Volume above estimates; EBITDA/t in line
Though volumes at international operations were 5% above estimates at 4.61mt (down 6% y-o-y), blended realisations disappointed with 9% q-o-q decline vs their expectation of it being flat. However, operating costs too remained benign (raw material and other expenditure), resulting in EBITDA/t of USD8 (broadly in line with their estimate). EBITDA/t in European operation was USD8 vs loss of USD1 in Q3. SE Asia operations, however, showed marked q-o-q improvement with EBITDA/t of US29 vs a loss of USD3 in Q3. The company has reported commissioning of the Benga project in May 2012 and expects to do shipments of 850kt of coking coal and 200kt of thermal coal in FY13.
Outlook and valuations: Positive; maintain ‘BUY’
Assuming that decline in raw material prices will outpace the decline in steel prices, Edelweiss maintain their positive view on the steel sector. They retain their earnings estimates and maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock with target price of Rs563/share. The stock is currently trading at FY14E EV/EBITDA of 4.8x.
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