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BUY
CMP Target Price
1QFY2013 % chg (qoq) 189 41 21.9 30 3.5 (21.4) (527)bp (13.3)
Performance Highlights
Y/E March (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT
Source: Company, Angel Research
`322 `384
12 Months
2QFY2013 2QFY2012 % chg (yoy) 196 33 16.6 26 174 30 17.2 22 12.6 8.9 (57) 18.6
Investment Period
Stock Info Sector Market Cap (` cr) Net debt Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code
Metals 496 (295) 0.5 365 / 233 9,133 10 18,682 5,684 TTSP.BO TTSP IN
For 2QFY2013, Tata Sponge Iron Ltd (TSIL) reported a top-line growth of 12.6% to `196cr from `174cr in 2QFY2012. However, the EBITDA margin contracted by 57bp on account of higher raw material cost as a percentage of sales. The net profit grew by 18.6% to `26cr in 2QFY2013 from `22cr in 2QFY2012 primarily due to one-time higher other income. Revenue growth normalizes, margin contracts: After a year of iron ore transportation issues, which impacted TSILs top-line performance, there has been a recovery in the companys capacity utilization to 81% in 2QFY2013 from 70% in FY2012. However, this was lower sequentially from 94% in 1QFY2013 owing to a planned shutdown during the quarter. The net raw material cost increased inspite of a fall in imported coal prices on account of utilization of high cost inventory from the previous quarter. This led to a contraction in the EBITDA margin by 57bp yoy to 16.6% in 2QFY2012. Recent media reports on deduction of bank guarantee for the Talcher coal block has been a matter of concern for the company. However, the company has not received any official notice regarding the same. Outlook and valuation: We expect TSIL to post a 12.5% CAGR in its revenue over FY2012-14E resulting from an improvement in the sales volume. The EBITDA margin is expected to expand by 62bp over FY2012-14E to 18.4% in FY2014E due to softening of raw material prices. The PAT is expected to grow at 18.6% CAGR over FY2012-14E to `106cr in FY2014E from `76cr in FY2012. The stock is currently trading at a PE of 4.7x its FY2014E earnings and P/B of 0.7x for FY2014E. We maintain our Buy recommendation on the stock with a revised target price of `384, based on a target P/B of 0.8x for FY2014E.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 54.5 1.8 10.0 33.7
3m 8.1 (5.8)
Key financials
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoIC (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research
FY2011 681 31.0 101 19.9 22.8 65.8 4.9 1.0 21.9 48.3 0.4 1.8
FY2012 634 (6.9) 76 (25.3) 17.8 49.1 6.5 0.9 14.1 28.8 0.4 2.2
FY2013E 750 18.3 101 33.0 18.6 65.4 4.9 0.8 16.5 33.6 0.3 1.5
FY2014E 803 7.0 106 5.7 18.4 69.1 4.7 0.7 15.3 32.8 0.2 0.9
Shareen Batatawala
+91- 22- 3935 7800 Ext: 6849 shareen.batatawala@angelbroking.com
2QFY13 196 146 74.8 5 2.7 12 5.9 163 33 16.6 0 4 9.2 37 19.0 11 30.5 26 13.2 15 16.7
2QFY12 174 125 72.1 4 2.5 14 8.2 144 30 17.2 0 5 6.2 31 18.1 10 30.8 22 12.5 15 14.1
yoy chg (%) 12.6 16.7 24.6 (19.6) 13.4 8.9 (57)bp (3.2) 47.9 18.1 17.0 18.6
1QFY13 189 128 67.5 6 3.1 14 7.5 148 41 21.9 0 5 7 44 23.0 14 31.8 30 15.7 15
qoq chg (%) 3.5 14.6 (8.1) (19.4) 10.5 (21.4) (527)bp (1.3) 37.1 (14.9) (18.3) (13.3)
1HFY13 385 274 71.2 11 2.9 26 6.7 311 74 19.2 0 9 16 81 12.7 25 31.2 55 14.4 15
1HFY12 319 219 68.6 10 3.0 28 8.7 256 63 19.7 0 9 11 64 10.2 20 31.3 44 13.9 15 28.7
% chg 20.4 25.0 16.1 (7.3) 21.2 17.4 (50)bp (2.0) 48.7 12.6 24.8 25.4
18.6
19.3
(13.3)
36.0
25.4
196 33 16.6 26
Investment rationale
Assured iron ore supply to evade manufacturing inconsistency
Iron ore supply is an important factor in controlling the capacity utilization and consequently the volume sales of sponge iron. TSIL has a long-term supply agreement with its parent Tata Steel for the supply of iron ore since the company leased out its mining assets to Tata Steel to operate Khondbond iron ore mines and supply iron ore to the company. This assured supply of iron ore to TSIL would evade the possibility of closure of the plants unlike other sponge iron manufacturers. The company had faced iron ore transportation issues during FY2012 which led to disruption in capacity utilization, thus impacting the revenue. These issues have been resolved and hence the company can now have uninterrupted manufacturing.
('000 MT)
80 60 40
108
92
95
71
74
55
72
78
89
20 0
57
60 50
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
(%)
Financials
Exhibit 4: Key assumptions
FY2013E Sponge iron volume growth (%) Change in MRP of Sponge iron (%)
Source: Angel Research
20.5 1.0
Earlier estimates FY2013E 787 16.2 58.5 FY2014E 837 17.5 66.9
Revised estimates FY2013E 750 18.6 65.4 FY2014E 803 18.4 69.1
30
('000 MT)
(%)
0 (10)
(` cr)
60 40
3.8
10 0
108
92
95
71
74
55
72
78
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
(14.7)
803
(25.3)
(25.1)
89
20
(15.3)
(20) (30)
(10) (20)
Softening raw material prices to aid margin expansion and PAT growth
The EBITDA margins are expected to expand by a mere 62bp over FY2012-14E to 18.4% due to softening of raw material costs, especially of coal, which would be partially set off by a fall in sponge iron prices. Consequently, we expect net profit to post an 18.6% CAGR over FY2012-14E to `106cr in FY2014E from `76cr in FY2012. The PAT margin, which has been consistently declining since FY2009, is expected to stabilize at higher levels of 13.3% in FY2014E from 11.9% in FY2012.
30.2
22 19.8 20 18
(%)
23.8 22.8
25 23 21 17.8 18.6
140 148
16.3 60 30 121 0 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E PAT (LHS) PAT margin (RHS) 85 101 76 14.9 11.9 101 106 13.4
16 13.3 14 12 10
18.4 19 17 15
184
124
155
EBITDA (LHS)
113
300 200 100 0 Oct-07 Oct-08 Price Oct-09 0.4x Oct-10 0.7x Oct-11 1.0x Oct-12 1.3x
(x)
0.8 0.6 0.4 0.2 0.0 Oct-07 Oct-08 Oct-09 Absolute P/B Oct-10 Oct-11 Oct-12
P/B (5 yr avg)
Risks
Volatile raw-material prices
Iron ore and coal are the major raw materials used in the manufacturing of sponge iron. Imported coal prices have declined by ~17% during 2QFY2013, thus reducing raw material costs. Also, iron ore prices have been volatile due to ban of mines in Karnataka. Raw material constitutes about 65% to the total expenditure and, hence, volatility in raw-material prices would affect the companys EBITDA margin.
Company Background
TSIL is a subsidiary of Tata Steel, which holds a 51% stake in the company. TSIL is a leading manufacturer of sponge iron, which is used as a raw material in steel manufacturing through the electric arc furnace (EAF) route. The company has an installed capacity of 3,90,000TPA and a 26MW captive power plant based on waste heat recovery from its kilns. Moreover, the company has a 45% stake in the Talcher coal block with estimated reserves of 120mn tonne, which has received environmental clearance, while forest clearance is still pending. TSILs plans of expanding its power-generation capacity of 26MW to 51MW is pending for want of statutory clearances change in eco-dynamics, etc.
Balance Sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Other Long Term Liabilities Long Term Provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Long Term Loans and advances Other non-current assets Investments Current Assets Cash Loans & Advances Inventory Debtors Other current assets Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 359 154 206 122 1 215 93 16 68 38 78 138 466 355 166 189 12 121 34 283 188 8 63 22 2 90 193 550 356 182 174 16 164 0 25 353 221 11 89 28 5 127 225 604 392 202 190 18 164 0 25 417 267 19 85 41 6 127 290 687 411 223 189 19 191 0 25 487 332 20 85 44 6 137 351 775 15 405 420 0 46 466 15 492 507 0 39 3 550 15 553 568 33 3 604 15 636 651 33 3 687 15 724 740 33 3 775 FY2010 FY2011 FY2012 FY2013E FY2014E
Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (0.2) (0.8) 418.2 (0.4) (1.4) (0.4) (2.2) 17.1 (0.4) (2.1) (0.5) (2.4) 1.4 42 20 61 31 1.9 35 16 58 3 1.8 44 14 76 3 2.0 42 20 76 11 2.0 39 20 76 9 24.1 40.7 22.0 26.9 48.3 21.9 16.4 28.8 14.1 18.7 33.6 16.5 17.4 32.8 15.3 20.1 0.7 2.0 27.3 128.8 (0.2) 50.0 20.0 0.7 2.4 32.6 (0.4) 18.3 14.9 0.7 1.9 19.4 (0.4) 11.0 16.1 0.7 2.1 22.7 (0.4) 12.5 15.8 0.7 2.1 22.1 (0.5) 11.4 54.9 54.9 67.5 8.0 272.8 65.8 65.8 77.8 9.3 329.3 49.1 49.1 61.1 8.0 369.1 65.4 65.4 77.9 10.0 422.9 69.1 69.1 82.7 10.0 480.4 5.9 4.8 1.2 2.5 0.8 3.2 0.9 4.9 4.1 1.0 2.9 0.4 1.8 0.5 6.5 5.3 0.9 2.5 0.4 2.2 0.4 4.9 4.1 0.8 0.2 0.3 1.5 0.3 4.7 3.9 0.7 0.2 0.2 0.9 0.2 FY2010 FY2011 FY2012 FY2013E FY2014E
10
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
TSIL No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
11