6th March, 2009

India
Tata Steel
Diversified CMP: Rs. 152 Target: Rs. 250

We initiate a buy on Tata Steel with a target price of 250, 65% appreciation from its current
levels. At CMP of 154, stock is trading at 2.3x TTM EPS of Rs.67. Our expectations put
forward P/E ratio at of 1.4 and 5.4 for FY09E and FY10E.
Sovid Gupta +911243024840
Equity Analyst: Fairwealth Securities We do not expect company to post great numbers for next 5 quarters, however with more
Private. Ltd. than 86% fall from 1 yr high of 925, the share price now discounts even a horrific recession.
We do not expect much downfall from here; however fall in steel prices below US $ 450 per
tonne can lead to fresh selling pressure on world steel stocks.
We have set a 1yr. target of Rs. 250 for Tata Steel at Global Steel Prices of around $600 per
tonne.
Outlook:
Priced on March’5, 2009 With the downturn in the global economy and the subsequent fall in investment and
±% potential +55% consumption, we believe the demand for steel will slowdown significantly in the near term in
Target set on 6th Mar’09 the international markets. The price of European hot-rolled coils, a benchmark product, has
fallen by half to 415 euros ($532) a ton from a high of 815 euros on June 18, according to
Metal Bulletin. Indian prices have dropped 40 percent in the same period. Going forward
sales will come much lower than last quarter, as volumes and prices will fall, however fallling
raw material prices and better product mix of corus will cushion the impact. Increased
Market Data exports from Indian Operations will also boost profitability. We expect prices of steel to stay
Beta 1.3 around $ 600 per tonne which will keep profits low for next 1 year. It is expected that H2
12M hi/lo 925/146 FY10 steel prices will recover. Also with new expanded plants at Jamshedpur and Orissa
Market cap, INR Crores 11123 long term profits are highly promising from Indian Operations Besides, European Operations
Shares in issue (mn.) 731 should become self sustaining in next 2 years as company’s cost cutting measures take
effect.
Reuters TISC.BO
Bloomberg TATA IN Future Estimates:
Key Financial Numbers

FY06 FY07 FY08* FY09E* FY10E* CAGR(%)

Net sales 20322 25212 131536 146770 92350 -16.21%
Share Holding Pattern EBITDA 6591 7888 17993 18225 8745 -30.28%
Promoters 34% Adj. PAT 3771 4280 8646 8210 2150 -50.13%
FII 13% Margins(%)
Institutional 25% EBITDA 32.40% 31.30% 13.70% 12.40% 9.47%
Public & Others 28% NPM 18.50% 16.90% 6.60% 5.80% 2.33%
Per Share Data
EPS 69 75 114 108 28
P/E 2.2 2.0 1.3 1.4 5.4
Source: Fairwealth Securities Research Estimates, Company data

Fairwealth Securities Page 1

 Tata Steel - Buy

Quarterly Result Round up:

Company reported PAT of Rs. 810 crore for the third quarter, however this includes inventory write
down, of Rs. 1740 crores, forex loss of Rs. 200 crore, tax write back of Rs. 40 crore and minority
interest write back of Rs. 80 crore.
Its consolidated net sales were up 4.05% at Rs 33,191.01 crore versus Rs 31,898.54 crore.
OPM were down by 352 bps at 8.61% versus 12.13% (y-o-y).
There was better realisation (price) per tonne of steel sold and lower costs due to reduced production,
both of which contributed to the profitability. Tata Steel’s overseas operations, including its European
subsidiary, Corus, contributed a net profit of around Rs 300 crore.
Also Corus had much better sales realisation of $1200 per tonne as compared to $1000 per tonne for
Arcelor Mittal.

Production: Led by production cuts in UK operations and Asian Subsidiaries, consolidated

Sales volumes declined by 23.6% y-o-y to 6.1mn tonnes (8.0mn tonnes). Tata Steel Thailand
cut production by 50% from .38 mn. Tonnes to 0.19 mn. Tonnes. Tata Steel Europe reduced
production by 33% from 4.89 million tonnes to 3.3 million tonnes.

Sales: Company has reported decline in volumes by 13.8% (y-o-y) in the current quarter along with
fall in the realization.

EBITDA - EBITDA has declined due to fall in steel prices and increase in the cost of production by Rs
600/ tonne (q-o-q).

Margins – Operating margins have declined by 1,007 Bps Y-o-Y and Net profit margins have declined
by 1,177 Bps Y-o-Y. Main reason for lower margins was higher inventory costs and forex losses.

Segment wise Quarterly Numbers

Tata Steel TS Nat Steel TSTH Tata
India Europe Asia (Thailand) Steel(Group)
Deliveries(MT) 1.1 4.3 0.4 0.3 6
Turnover
(USD million) 991 5,381 343 127 6,839
EBIDTA 306 358 -16 -76 611
EBIDTA
margin(%) 31% 7% -5% -60% 9%
PBT 142
PBT 2%
PAT** 168
PAT
margin(%) 2%
ROIC(pretax) 8%
Source: Company ppt

Fairwealth Securities Page 2


Consolidated debt of the group stands at
US $11.5 bn(Rs. 58000 crore).
Standalone debt of Indian Company is US
$ 4.5 bn. Has increased from Rs. 18000
crore in March 2008 to Rs.23000 crore
due to dollar appreciation.
Exhibit : Bench Mark HRC World Export Prices
We estimate Company’s European
business to post significant losses in Q4
FY09.
Fairwealth Securities
Tata Steel - Buy
Highlights:
The realizations have come down from Rs 42,000 to 33,000 per tonne in the reported
quarter. However, the prices at the end of December were Rs 31,000.
Tata Steel (Group)
th
On 4 March’09 , global credit rating agency Moody’s Investors Service downgraded the
corporate family rating of Tata Steel from the highest sub-investment grade rating to Ba2,
which is two notches below the lowest investment grade rating. "The rating action reflects
the deteriorating operating performance of the company as a result of the dramatic reversal
apparent in steel industry dynamics following, in turn, by a sharp fall in demand and prices,"
said Ivan Palacios, a Moody's assistant vice-president, justifying keeping the company on
review for further downgrade.
Tata Steel (Corus)
Tata Steel Corus has announced that production would be cut to a level of 40 percent from
current levels of 30 percent.
According to a recent news in an article (mydigitalfc) Tata Steel is infusing US $ 200 million
capital in corus immediately to meet agreed covenants. As of Dec’08 Corus had Debt/Ebitda
of 2.3 and Interest coverage ratio stood at 5.5.
Tata Steel India:
Battered by the global slowdown and the prevailing liquidity crunch, Tata Steel has delayed
its green field projects at Jharkhand and Chhattisgarh. However, the Company will continue
with its expansion plans at Jamshedpur to expand total capacity to 10 MTPA and the
construction of a 3 mtpa plant in Orissa.
Cost cutting measures:
Besides company is taking following steps to cut costs:
 Aim for Better cash management and liquidity management across all units.
 Liquidating existing inventory and writing down losses (Tata Steel Thailand).
 Increasing cash flow by reducing net working capital and postponing capital
expenditure(for Nat Steel Asia)
 Maximize sales for most profitable units(Tata Steel India)
Tata Steel UK:
The company makes steel products for sale around the world, and should benefit from the
European stimulus plans as it is the leading supplier of steel for the continent's auto,
construction, and household-products industries-direct beneficiaries of the stimulus plans.
 Cash savings of up to 600 million pounds ( to be realized by H2’09)
 Reducing production, saving employment cost (reducing employees by 3500 from
42000 currently.
 Shutdown of three smelters and selling off Aluminum units.
Page 3

We expect Indian Operations to show
higher sales, margins similar to Q3 and
significantly higher Export Earnings.
Fairwealth Securities
Tata Steel - Buy
Tata Steel India
Tata Steel (India) exports only 12% of their Steel output, company has said that it will focus
more on exports to take benefit of rupee depreciation. According to company statement
company it plans to triple its exports to 330 mn tonnes to take advantage of currency
depreciation.
Industry Performance
According to recent report on steel sector 'Indian Steel Industry 2009: squeezed, but strong'
by Ernst and Young India has the potential to grow at double digit rates and should target a
production of 125 mn tonnes in the medium term. Report mentions, China example from
1998-2003, when world steel production grew by 1.6%, china doubled its steel production
growing by 18%.
According to the report, the near-term outlook for the industry is challenging as the growth in
key end-user industries such as construction, automobiles and manufacturing has taken a
backseat.
The downturn has also led to a decline in the prices for raw materials such as iron ore and
coking coal, albeit at a lower rate than the dip in steel prices. Further, prices are expected to
decline in 2009 as consumption levels are projected to continue plummeting.
To avoid large-scale dumping and protect domestic players, the government, has taken
folowing steps:
1. Removal of export duty
2. Restored DEPB (Duty exemption pass book) to promote exports.
3. Imposed 5% import duty on steel to check cheap imports from china
4. Cut in excise duty from 14% to 10%
5. Customs duty of 5%
International steel prices rose sharply by 50-60% in the first half of 2008 but prices in the
domestic market was reigned in by the government in an attempt to check inflationary
pressures and ensure adequate supply. As a result, domestic steel prices went up by
around 25% only in the corresponding period. Therefore, as we witness steep correction in
international steel prices by 25% (from $1200 to $900), we do not expect similar declines in
domestic prices that have fallen by 16% to $750 but rather stabilize in the coming quarters.
In our view, Q3FY09E and Q4FY09E results will be better as raw material prices will come
down further and long term contracts will be re-negotiated at lower rates in December. While
rupee depreciation in Q2FY09 has resulted in increasing import cost and negative MTM
provisioning on un hedged foreign currency exposures, falling freight rates and expected
rupee appreciation will positively impact the bottom line in the coming quarters.
Page 4
 Tata Steel - Buy

Company Description:

Tata Steel (India), lowest cost producer, after acquisition of Corus (which is several times its
size) has become the sixth largest steel maker globally. The combined entity (Tata-Corus)
currently has its business spread over Europe (37%), UK (22%), Asia (24%), North America
(8%), and Rest of the World (9%). Tata-Corus (26mtpa) now has 17% raw material security
and plans to increase it to 50-60%. The production will increase to 34mtpa through
Brownfield expansions at Jamshedpur and Greenfield projects in Orissa.

Financial Ratio Analysis:

Company had interest costs of 5.16%,

going forward interests costs will increase
in tough economic environment. Dupont Analysis(ts)
Year End 200803 200703 200603
For FY10E EBIT margin can fall as low as
8% while Interest coverage ratio can fall to a.OPM % 40 39 39
a dangerous level of 2.0
b.EBIT Margin % 36 34 33
c.Turnover / Assets 0.49 0.84 1.4
d.ROA % (d=b*c) 17 29 47
e.Interest Cost % 5.16 2.6 6.94
f.Debt / Assets 0.4 0.41 0.21
g.Interest Dilution % (g=e*f) 2 1 1
h.ROA after Interest %(h=d-g) 15 27 45
i.Assets / Shareholder Funds 1.66 1.69 1.26
j.ROE before other % (j=h*i) 26 46 57
k.Other Inc/Shareholders fund % 4 4 4
l.RONW after Other % (l=j+k) 29 51 61
m.Tax Rate % 33 32 33
n.ROE after Tax% (n=l-(l*m/100) 19 34 41
o.Book Value 299 240 176
p.Earnings Per Share (p=n*o) 58 82 72
Source: Capital Line

Fairwealth Securities Page 5

 Tata Steel - Buy

Key Risks:

 A slower-than-expected recovery of the global economy. Steel demand has increased after
falling to record levels, as dealers restock steel, which may be a short term phenomenon.
Steel demand and prices are expected to remain subdued in the existing global scenario.
Continued depression in global steel prices and higher raw material costs will affect
profitability further.
 Any delay in the commissioning of new capacities and further downgrade of company’s debt
ratings will lead to rating downgrade.
 Company has USD 875 million of FCCB convertible at Rs.785. Rupee depreciation is hurting
the company in terms of interest and debt payment and in MTM losses as well. However we
expect limited loss as the debt matures in 2012. Recent downgrades by Moody’s for the
group will make raising fresh debt more difficult.
 Increase in Raw Material Costs.
Captive iron ore provides only 20% and captive coal mines provides for only 14% of total
steel production for Tata Steel( Group) on a consolidated basis. Raw material costs are 50%
of net sales for the group, in case raw material prices increase or do not drop in line with
steel price. It could lead to further pressure on company’s profitability.

.
Tata Steel stock has been battered by the from
June onwards, stock dropped 80% in four
months from June’08 to Oct’08 as Commodities
prices crashed across the world, while Sensex
has dropped by only around 50% during last
one year(from March’08)

Stock Price movement versus nifty.

Fairwealth Securities Page 6

 Tata Steel - Buy

Investment Rational
Although we expect company to post lower profits and sales for 2010, we maintain Tata
Investment Rational: Steel as long term buy for long tem with a price target of 230.

Tata Steel is leveraging the low cost advantage in India to feed the finishing mills of its
Increased capacity from 2011 onwards as
global subsidiaries. The Brownfield expansion at Jamshedpur to raise capacity to 10mtpa by
company expands production in high margin
2010 and the Greenfield project in Orissa will raise total capacity from 5mtpa currently to
Indian Business.
13mtpa by 2010 in India. Long term demand for steel will remain high In India as econmy is
still expected to grow more than 6% .
Increased focus on exports from India Ops.

Tata Steel is focusing to expand the thin margins of Corus through reworking of product
Reworking of pricing in European Business
pricing, procurement policies, asset sweating and further improvement in Operating
and Cost cutting measures to cushion losses.
efficiencies. Corus now has a focused promoter.

Drop in freight rates is likely to benefit Tata steel UK unit( on a consolidated basis Tata Steel
imports 30% of coal requirement

Tata Steel (India) imports only 30% of its total coal requirement, while other players import
most of their coal requirement depreciating rupee will add to the landed cost of coal,
impacting other players much more.

Tata Steel (India) exports only 12% of their Steel output, company has said that it will focus
more on exports to take benefit of rupee depreciation. According to company statemnt
company plans to triple its exports to 330 mn. tonnes

Fairwealth Securities Page 7

 Tata Steel - Buy

TECHNICAL OUTLOOK TATASTEEL

CLOSING PRICE: 151.80 52-Week HIGH -925

20 DAY SIMPLE MA: 174 52Week LOW -137.50
50 DAY SIMPLE MA: 192
200 DAY SIMPLE MA: 441

TATA STEEL has a good support at around 145-146 & then at 130 .One can accumulate the stock on dips till 130 & hold on for a
period of 5-6 months for a price Target of 240.-250.

Fairwealth Securities Page 8

 Tata Steel - Buy

Annexure:

1. Income Statement:

Breakup as %age of Sales Annual Results (Cons) Rs. Crore

Standalone Consolidated 2008 2007 2006

INCOME :
Net Sales 100 100 131500 25118 20244
Other Income 7431 723 349
Stock Adjustments 891 540 47
Total Income 139822 26381 20640

EXPENDITURE :
Raw Materials 20 45 59594 9171 6706
Power & Fuel Cost 5 4 5639 1601 1134
Employee Cost 9 13 16893 2032 1720
Others 28 25 32648 5619 4498
Total Expenditure 60 87 114775 18423 14058

Operating Profit 45 19 25047 7958 6583

Interest 5 3 4539 634 208
Gross Profit 40 16 20508 7324 6375
Depreciation 4 3 4137 1011 860
Profit Before Tax 36 12 16371 6313 5515
Total Tax 12 3 4049 2147 1794
Net Profit before Minority Interest 9 12322 4166 3721
Minority Interest 140 68 19
Net Profit after Minority Interest 9 12182 4098 3702
Extraordinary Items 4832 -77 -1
Adjusted Net Profit 23 6 7350 4175 3703
Source: Company Report, Capital Line

For Tata Steel India Raw Material costs stand in the range of 20%, which is one of the least in the sector, while the same stood at 45% for
Tata Steel Corus.

Fairwealth Securities Page 9

 Tata Steel - Buy
2. Cash Flow Statement: 3. Fund Flow Statement:

200803 200703 200603 200803 200703 200603

SOURCES OF FUNDS :
Cash Flow Summary
Share Capital 6203 580 553
Cash and Cash Equivalents at
16494 1193 487 Reserves Total 27971 13895 9729
Beginning of the year
Total Shareholders Funds 34174 14475 10282
Net Cash from Operating
13420 5503 3736 Minority Interest 833 598 124
Activities
Secured Loans 35415 4961 2503
Net Cash Used in Investing
-46195 -16288 -2500 Unsecured Loans 18178 19964 874
Activities
Total Debt 53593 24926 3377
Net Cash Used in Financing
20513 20480 -945
Activities
Total Liabilities 88599 39999 13783
Net Inc/(Dec) in Cash and Cash
-12262 9695 290
Equivalent
Cash and Cash Equivalents at APPLICATION OF FUNDS :
4232 10888 777
End of the year Net Block 51169 11114 9545
Source: Company Report, Capital Line Capital Work in Progress 8844 3326 1357
Investments 3367 16498 3479
Current Assets, Loans &
Advances
Inventories 23064 3888 2773
Sundry Debtors 18696 1687 1219
Cash and Bank 4232 10888 777
Loans and Advances 15474 1982 1139
Total Current Assets 61467 18444 5908
Less : Current Liabilities
and Provisions
Current Liabilities 26411 5609 3293
Provisions 7538 3198 2478
Total Current Liabilities 33949 8807 5770
Net Current Assets 27518 9638 138
Miscellaneous Expenses
156 210 256
not written off
Deferred Tax Assets 3916 989 779
Deferred Tax Liability 6371 1775 1771
Net Deferred Tax -2454 -786 -992
Total Assets 88599 39999 13783
Contingent Liabilities 4228 2478 2383

Source: Company Report, Capital Line

Fairwealth Securities Page 10

 Tata Steel - Buy

Disclaimer

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While
the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making
any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in
the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information
updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory
Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,
Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is
in circulation.

Fairwealth Securities Page 11