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TATA Sponge Iron Ltd BUY


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C.M.P: Target Price:
Rs.333.70 Rs.384.00
June 22, 2010 R
1 Year Comparative Graph SYNOPSIS S
• TSIL is engaged in business of T
manufacturing high-grade sponge iron. It
has an annual manufacturing capacity of
390,000 tonnes of sponge iron from its C
three kilns.

TATA Sponge Ltd BSE SENSEX • The company planning to set up a 30-mw
A
power plant. The cost of the project is
Stock Data anticipated to be Rs 10,000 mn. L
Sector Steel
• Tata Sponge Iron is planning to set up a 1
Face Value Rs. 10.00 million tonne steel plant in Orissa.
L
52 wk. High/Low (Rs.) 415.00/168.00
• TSIL's manufacturing facilities have been
Volume (2 wk. Avg.) 45247
accredited with ISO-9002 and ISO 14000
BSE Code 513010
certifications for its quality management.
Market Cap (Rs.In mn) 5138.9 R
• The capacity enhancement for sponge iron
Share Holding Pattern
production, pelletisation of iron ore, power E
generation at pit head of coal block etc. are
being examined to optimise the revenue in
future. S
E
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Financials
V.S.R. Sastry
(Rs.in.mn) FY10 FY11E FY12E R
Equity Research Desk Net Sales 5355.5 5891.0 6480.1
vsrsastry@firstcallindiaequity.com EBIDTA 1458.5 1657.6 1823.4 C
Dr. V.V.L.N. Sastry Ph.D. PAT 845.2 973.8 1073.9
Chief Research Officer 54.88 63.23 69.74
drsastry@firstcallindia.com
EPS
H
P/E 6.08 5.28 4.79

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Peer Group Comparison
Market
Name of the company CMP(Rs.) Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

TATA Sponge 333.70 5138.9 54.88 6.08 1.18 80.00

SAIL 198.90 821536.7 16.34 12.17 2.37 26.00

TATA Steel 497.35 441220.3 56.87 8.75 1.81 160.00

Jindal Steel 676.00 628753.1 15.89 42.54 11.63 550.00

Investment Highlights

Q4 FY10 Results Update

Tata Sponge Iron reported a phenomenal rise in standalone net profit for the
quarter ended March 2010. During the quarter, the profit of the company rose
2.89 times to Rs 333.50 million from Rs 115.50 million in the same quarter
previous year. Net sales for the quarter for the quarter rose 27.38% to Rs 1,709.30
million from Rs.1341.90 million in the same quarter last year. Total income for the
quarter rose 25.73% to Rs 1,719.70 million, when compared with the prior year
period. It posted earnings of Rs 21.66 a share during the quarter, registering 2.89
times growth over prior year period.

Quarterly Results - standalone (Rs in mn)

As At Mar-10 Mar-09 %change

Net sales 1709.30 1341.90 27.38

PAT 333.50 115.50 188.74

Basic EPS 21.66 7.50 188.74

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Break up of Expenditure

Recommends Dividend

Tata Sponge Iron Ltd has recommended a dividend of Rs. 8/- per equity share (i.e.
80%) for the year ended March 31, 2010.

Company Profile

Tata Sponge Iron (TSIL) was incorporated in 1982 as joint venture between Tata Steel
and the Industrial Promotion and Investment Corporation of Orissa (IPICOL). Later in
1991, Tata Steel acquired IPICOL’s stake in joint venture. TSIL is associate company
of Tata Steel. The company also operates a modern R&D facility that is set up along
with a chemical laboratory to conduct the monitoring process. This R& D facility
introduced Tisco Direct Reduction (TDR) – an innovative technology for making sponge
iron. TSIL's manufacturing facilities have been accredited with ISO-9002 and ISO
14000 certifications for its quality management. Tata Sponge Iron operates two captive
power plants that produce a total capacity of 26 MW of power. The company is
engaged in business of manufacturing high-grade sponge iron that is consistent in

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quality. The company has an annual manufacturing capacity of 390,000 tonnes of
sponge iron from its three kilns. Its production plant is situated at Bilaipada in Orissa.

Business Areas

Business Areas

Power
Generation
Sponge Iron TDR Technology

Sponge Iron:

India is the world's largest producer of sponge iron, most of which is produced
primarily through the coal based method of production. Growth in the sponge iron
production can be attributed largely to the popularity of secondary steelmaking route,
which has shown a phenomenal growth in India. The proportion of crude steel
produced by the secondary steel sector rose from 26 mMT(37%) in 1999-2k to 54
mMT(59%) in 2007-08. This has been mainly due to the lower investment cost of the
EAF as compared with the integrated blast furnace--oxygen converter route and also
because of its greater flexibility of product mix.

Power generation:

In order to cater to rapid industrialization, the demand for electrical energy is on the
rise. Conforming to stringent environmental norms, energy through waste heat
recovery has emerged as one of the better alternatives to address this need. The

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Ministry of Environment & Forest has made it compulsory for the DRI plants to
generate captive power by using kiln waste heat in order to emphasise on generating
power through this non conventional way.Tata Sponge’s first power plant using waste
heat was commissioned in 2001. Later, it added another power plant in 2006 to
increase its overall power producing capacity to 26 MW

TDR Technology:

Steel production through the conventional blast furnace route requires coking coal in
abundance, which is a limited resource in our country and is also becoming scarce
world over. Hence, a new technology -TISCO Direct Reduction (TDR) technology was
evolved that helped in the reduction of iron ore by using abundantly available non-
coking coal.

SWOT Analysis:
Strengths

• Rich mineral resources like iron ore, coal and other raw material for iron and steel

• Low unit labour cost, commensurate with skill

• Strong brand name

• Strong Management

Weakness

• High cost of basic inputs

• Unexplored rural market

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Opportunities

• The capital required for setting up integrated steel plants is large, the growth in
demand of steel during the year was met generally by secondary steel sector or
through import of steel.

• Slowing down of growth in steel industry, integrated steel plants still fall short in
capacity to meet full demand of steel in India. Secondary steel sector will continue
to play significant role in steel supply in the country.

• The allotment of coal block to the company will in future ensure smooth and
consistent supply of coal, both in terms of quantity and quality.

Threats

• The company does not have its own iron ore mines and shall meet only part of its
coal requirement in future from its colliery.

• Rise in transportation cost

• Global warming and climate change

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Financials Results
12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY09 FY10 FY11E FY12E

Description 12m 12m 12m 12m

Net Sales 6173.00 5355.50 5891.05 6480.16

Other Income 109.80 63.90 67.10 73.80

Total Income 6282.80 5419.40 5958.15 6553.96

Expenditure -4241.60 -3960.90 -4300.47 -4730.51

Operating Profit 2041.20 1458.50 1657.68 1823.45

Interest -46.40 -2.50 -2.70 -2.84

Gross profit 1994.80 1456.00 1654.98 1820.61

Deprecation -183.10 -193.80 -201.55 -217.68

Profit Before Tax 1811.70 1262.20 1453.43 1602.94

Tax -605.00 -417.00 -479.63 -528.97

Profit After Tax 1206.70 845.20 973.80 1073.97

Equity capital 154.00 154.00 154.00 154.00

Reserves 3343.10 4046.70 5020.50 6094.46

Face value (Rs.) 10.00 10.00 10.00 10.00

EPS 78.36 54.88 63.23 69.74

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Sep-09 31-Dec-09 31-Mar-10 30-Jun-10E

Description 3m 3m 3m 3m

Net sales 1149.10 1296.80 1709.30 1623.84

Other income 19.60 12.30 10.40 10.09

Total Income 1168.70 1309.10 1719.70 1633.92

Expenditure -902.50 -951.90 -1180.00 -1055.49

Operating profit 266.20 357.20 539.70 578.43

Interest 0.00 0.00 -2.50 -2.25

Gross profit 266.20 357.20 537.20 576.18

Deprecation -49.00 -48.90 -47.80 -48.76

Profit Before Tax 217.20 308.30 489.40 527.42

Tax -71.30 -105.00 -155.90 -174.05

Profit After Tax 145.90 203.30 333.50 353.37

Equity capital 154.00 154.00 154.00 154.00

Face value (Rs.) 10.00 10.00 10.00 10.00

EPS 9.47 13.20 21.66 22.95

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Key Ratios

Particulars FY09 FY10 FY11E FY12E

No. of Shares(In Million) 15.4 15.4 15.4 15.4

EBITDA Margin (%) 33.07% 27.23% 28.14% 28.14%

PBT Margin (%) 29.35% 23.57% 24.67% 24.74%

PAT Margin (%) 19.55% 15.78% 16.53% 16.57%

P/E Ratio (x) 4.26 6.08 5.28 4.79

ROE (%) 34.51% 20.12% 18.82% 17.19%

ROCE (%) 63.58% 39.32% 35.92% 32.66%

EV/EBITDA (x) 2.52 3.52 3.1 2.82

Book Value (Rs.) 227.08 272.77 336.01 405.74

P/BV 1.47 1.22 0.99 0.82

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Charts:

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Outlook and Conclusion

At the current market price of Rs.333.70, the stock is trading at 5.28 x FY11E
and 4.79 x FY12E respectively.
Price to Book Value of the stock is expected to be at 0.99 x and 0.82 x
respectively for FY11E and FY12E.
Earning per share (EPS) of the company for the earnings for FY11E and FY12E
is seen at Rs.63.23 and Rs.69.74 respectively.
On the basis of EV/EBITDA, the stock trades at 3.10 x for FY11E and 2.82 x for
FY12E.
We expect that the company will keep its growth story in the coming quarters
also. We recommend ‘BUY’ in this particular scrip with a target price of
Rs.384.00 for Medium to Long term investment.

Industry Overview

Sector structure/Market size

The steel industry in India has been moving from strength to strength and according
to the Annual Report 2009-10 by the Ministry of Steel, India has emerged as the fifth
largest producer of steel in the world and is likely to become the second largest
producer of crude steel by 2015-16.

Recently, Steel Minister, Mr Virbhadra Singh said that India will become the world's
second-largest steel producer by 2012, more than doubling its capacity to 124 million
tonnes (MT) as part of the push being given to assist overall infrastructure
development.

Production

Steel production rose 4.2 per cent to reach 60 MT in 2009-2010, according to the
Ministry of Steel.

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The National Steel Policy 2005 had projected an annual steel consumption growth of 7
per cent based on GDP growth rate of 7-7.5 per cent and production of 110 MT of
crude steel by 2019-2020. Nonetheless, with the current rate of ongoing greenfield and
brownfield projects, the Ministry of Steel has projected that these growth trends are
likely to be exceeded and it is envisaged that in the next five years demand will grow at
higher annual average growth rate of over 10 per cent as compared to around 7 per
cent growth achieved between 1991-92 and 2005-06.

Moreover, according to the ministry, the crude steel production capacity in the country
by 2011-12 will be nearly 124 MT.

According to the Ministry of Steel, 222 memorandum of understanding (MoUs) have


been signed with various states for planned capacity of around 276 MT. Major
investment plans are in Orissa, Jharkhand, Chattisgarh, West Bengal, Karnataka,
Gujarat and Maharashtra.

According to the Annual Report 2009-10 by the Ministry of Steel, domestic crude steel
production grew at a compounded annual growth rate of 8.6 per cent during 2004-05
and 2008-09.

Consumption

India's steel consumption rose 8 per cent in the year ended March 2010, over the
same period a year ago on account of improved demand from sectors like automobile,
infrastructure and housing. The country’s steel consumption increased to 56.3 MT in
the 12 months to March 2010 from 52.3 MT in the previous year, as per the Ministry
of Steel.

Investments

A host of steel companies have lined up major investment proposals. Furthermore,


with an expanding consumer market, the Indian steel industry is likely to receive huge
domestic and foreign investments.

The domestic steel sector has attracted a staggering investment of about US$ 238
billion, according to the Minister of State for Steel, Mr A. Sai Prathap.

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This consists of nearly 222 MoUs signed between the investors and various state
governments mostly in the states of Orissa, Jharkhand, Chhattisgarh and West
Bengal.

• SAIL is planning to set up a 12-million tonne plant in Jharkhand.

• In December, India’s largest engineering conglomerate Larsen & Toubro (L&T)


and state-owned Nuclear Power Corporation of India Limited (NPCIL) formed a
US$ 373.2 million joint venture for specialised steel and forging products.

• Stainless steel manufacturer and exporter, Varun Industries, is setting up a


US$ 171.8 million stainless steel-cum-alloy steel plant at Rohat, Jodhpur.

• Tata Steel has entered into a joint venture with Japan’s Nippon Steel for
production and sales of automotive cold-rolled flat products at Jamshedpur.
The JV is expected to invest US$ 400 million to set up an automobile venture in
India.

• Steel major, JSW Steel has earmarked a capex of US$ 1.6 billion for 2010-11
and plans to increase capacity of its Bellary plant in Karnataka from 7 MT to 10
MT by end of 2010-11.

Government Initiative

As per the Press Information Bureau, during 2009, the government took a number of
fiscal and administrative steps to contain steel prices. Central value added tax
(CENVAT) on steel items was reduced from 14 per cent to 10 per cent with effect from
February 2009.

Moreover, in the Union Budget 2010-11, the government has allocated US$ 37.4
billion to the infrastructure sector and has increased the allocation for road transport
by 13 per cent to US$ 4.3 billion which will further promote the steel industry.

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________________ ____ _________________________
Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

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