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Result Update

June 15, 2010


Rating matrix
Rating : ADD Tata Steel (TISCO)
Target : Rs 517
Target Period : 12 months Rs. 484
Potential Upside : 7%
WHAT’S CHANGED…
Key Financials (Consolidated) PRICE TARGET ............................................................. Changed from Rs 450 to Rs 517
(Rs Crore) FY09 FY10 FY11E FY12E
EPS (FY11E) ........................................................... Changed from Rs 47.91 to Rs 45.87
Net Sales 145686.3 101757.8 113915.8 123045.4
EBITDA 18127.7 8042.7 14304.7 16227.3 EPS (FY12E) ........................................................... Changed from Rs 58.28 to Rs 61.03
Net Profit 4950.9 -2009.2 4067.7 5411.9 RATING................................................................................ Changed from SELL to ADD
Valuation summary (Consolidated) Strong comeback but challenges remain…
FY09 FY10E FY11E FY12E
Tata Steel staged a STRONG comeback in Q4FY10 with sequential net
PE (x) 7.1 NA 10.6 7.9 sales and net profit growth of 5% and 415% respectively on the back of
Target PE (x) 6.6 NA 9.8 7.4 ~5% QoQ increase in sales volume and flat blended realisations.
EV/EBITDA (x) 4.3 10.4 6.3 5.3 EBITDA margins came in at a much improved level of 19.4% on the back
P/BV (x) 2.7 3.1 2.6 1.9 of increase in EBITDA/tonne at Corus to US$94/tonne. Net profit for
RoNW (%) 17.4 -7.1 13.0 15.2
FY10 remained in negative due to large realised losses in H1FY10.
Though we expect earnings to improve in FY11E & FY12E on the back of
RoCE (%) 15.0 4.2 10.8 12.6
operational savings, improvement in steel prices and higher capacity
utilization but balance sheet concerns with high leverage, increase in
contracted raw material costs at Corus level and looming further equity
Stock data dilution makes us believe that the company needs to overcome strong
Market Capitalisation Rs 42934 Crore challenges ahead.
Debt (FY09) Rs 53396.4 Crore
ƒ Exceptional performance in H2FY10
Cash & Invst (FY09) Rs 12318.8 Crore
EV Rs 84011.6 Crore The management has delivered better than its guidance in terms of
52 week H/L 739/330 H2FY10 performance with Indian operations reporting an EBITDA
Equity capital Rs 886.7 Crore margin of 44% (as against 33% in H1FY10) and Corus benefiting
Face value Rs 10 from higher capacity utilization and reduced costs resulting in
MF Holding (%) 23.9 positive EBITDA to the tune of Rs 2300 crores (as against losses of
FII Holding (%) 20.8 Rs 3655 crores in H1FY10.
Price movement (Stock vs. Nifty) ƒ Positive guidance maintained for Corus
800 6000 The company has maintained its positive outlook for Corus with
700 5000 capacity utilization in excess of 85% in H1FY11E and cost reduction
600 initiatives expected to realize benefits of 250 million pounds in FY11.
4000
(In Units)

500 The company expects steel price trends to fully account for raw
(In Rs)

400 3000 material cost inflation in FY11 at Corus.


300 2000
200
100 1000 Valuation
0 0 At the CMP of Rs 484, the stock trades at consolidated FY11E PE of 7.9x
Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 and FY11E EV/EBITDA of 5.3x. Factoring in the better-than-expected
Tata Steel Nifty performance and improved outlook, we value the company at 5.5x
consolidated FY12E EV/EBITDA to arrive at a revised target of Rs 517 for
Analyst’s name the stock. We change our stance on the stock and assign it an ADD rating.
Pankaj Pandey
pankaj.pandey@icicisecurities.com Exhibit 1: Performance Highlights (Consolidated)
Goutam Chakraborty (Rs Crore) Q4FY10 Q4FY10E Q4FY09 Q3FY10 YoY (Chg %) QoQ (Chg %)
goutam.chakraborty@icicisecurities.com Net Sales 27503.8 29034.5 26431.0 26202.0 4.1 5.0
Abhisar Jain EBITDA 4750.2 4306.6 33.0 2950.6 14281.3 61.0
abhisar.jain@icicisecurities.com EBITDA Margin (%) 17.3 14.8 0.1 11.3 + 1720 bps + 600 bps
Depreciation 1094.6 1213.5 928.3 1154.7 17.9 -5.2
Interest 660.0 836.1 733.7 763.0 -10.0 -13.5
Reported PAT 2434.1 1266.9 -4839.0 472.6 LP 415.0
EPS (Rs) 27.4 14.3 -66.3 5.3 LP 415.0
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Tata Steel (TISCO)

Q4FY10 Result Analysis


Tata Steel’s group performance improved further in Q4FY10 on the back
of strong EBITDA situation at Corus and continuation of robust
performance of Indian operations. Corus managed to achieve an EBITDA
of ~US$94/tonne as TCP plant was mothballed mid-way during the
quarter and product prices witnessed an up move. Asian subsidiaries had
an average quarter with subdued EBITDA performance due to closing of
gap between rebar and scrap prices in Asian markets whereas strong
demand in domestic market backed by infrastructure and rural spend
ensured excellent standalone performance by Tata steel’s Indian
operations with EBITDA margins of 43.3%.

The company reported 19.4% EBITDA margins, up Exhibit 2: Tata Steel group performance – Q4FY10
smartly from 11.3% in Q3FY10 as Corus reported surge Tata Steel- Tata Steel- Tata Steel- Tata Steel -
Particulars (Rs Crore) India Europe NSA(*) Thailand Group (**)
in profitability on EBITDA level. Overall group EBITDA
came in at a robust Rs 8202/tonne on account of Sales volume (MT) 1.7 3.9 0.6 0.3 6.5
better-than-expected performance from Corus. Turnover 7225.5 17091.1 1486.8 907.3 27503.0
Realisation/tonne (Rs) 42502.8 43823.4 24779.5 30244.5 42312.3
EBITDA 3130.7 1644.0 49.4 13.5 5331.7
EBITDA Margin (%) 43.3 9.6 3.3 1.5 19.4
EBITDA/tonne (Rs) 18416.1 4215.3 823.5 449.2 8202.6
* NSA steel operations only , ** Includes profits from JV's & Subsidiaries
Source: Company, ICICIdirect.com Research

Blended realisations/tonne have remained largely Exhibit 3: Per tonne analysis - Consolidated
flat. EBITDA/tonne has shown a smart improvement Rs/Tonne Q4FY10 Q4FY09 Q3FY10 YoY (%) QoQ (%)
to Rs 7308/tonne due to lower raw material costs Net Realization 41906.0 41313.4 41978.3 1.4 -0.2
and reduction in other expenses (sequentially) Total Cost 35005.6 43996.6 37441.9 -20.4 -6.5
through cost saving measures like ‘Fit for Future’ Stock Adjustment 714.4 7343.8 -1302.2
Raw Material Consumed 11436.2 12031.8 12934.9 -5.0 -11.6
and ‘Weathering the storm’ at Corus. Total cost
Employee Expenses 6061.2 6435.7 6763.1 -5.8 -10.4
dipped by ~7% QoQ on a per tonne basis due to
Purchase of power 1520.2 1882.9 1746.3 -19.3 -12.9
sustained efforts of lowering costs and improving Freight & Handling 2291.8 2173.9 2327.0 5.4 -1.5
efficiencies Other Expenses 8940.3 8204.8 9725.1 9.0 -8.1
EBITDA 7307.9 55.0 4751.3 13175.1 53.8
Source: Company, ICICIdirect.com Research

Exhibit 4: Tata steel Europe performance


Management has been able to deliver on its H2FY10
guidance of positive EBITDA for Corus with an Particluars (US$ Mn) Q4FY10 Q4FY09 YoY Gr % FY10 FY11E
EBITDA/tonne of ~US$38/tonne achieved in Q3FY10 Liquid Steel production 3.7 2.8 32.1 15 15
and ~US$94/tonne in Q4FY10. We expect Steel Deliveries 3.9 3.5 11.4 14.7 15.5
profitability to be muted in Corus going forward mainly Turnover 3805.0 3700.0 2.8 1465.9 16551.9
due to increase in contracted raw material costs and Realisation/tonne (US$) 975.6 1057.1 -7.7 99.7 1067.9
concerns of slow recovery in European markets. EBITDA 366.0 -318 LP -30.1 852.5
EBITDA Margin (%) 9.6 -8.6 NA -2.1 5.2
EBITDA/tonne (US$) 93.8 NA NA -2.0 55.0
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Page 2
Tata Steel (TISCO)

Subsidiary wise performance – Improvements to continue


Tata steel’s subsidiary performance shows clear domination of Indian
operations in terms of profitability with EBITDA/tonne of ~US$410 in
Q4FY10, up from US$290/tonne in Q3FY10. Company’s European
operations have also shown a smart jump in profitability with
EBITDA/tonne at US$94/tonne in Q4FY10. We expect company’s Indian
operations to maintain strong performance on the back of raw material
integration and strong domestic demand. Corus is expected to show
muted profitability with an EBITDA of US$55/tonne in FY11E as more than
expected increase in raw material prices is expected to offset the rise in
steel prices and cost savings.

Sales volume have remained almost flat QoQ across Exhibit 5: Performance metrics
various subsidiaries but blended realisations/tonne Q4FY10 Q4FY09 Q3FY10 FY11E FY12E
have improved in the range of 3-10% in Asian India
operations and ~2% in Corus due to better product Sales Volume 1.7 1.8 1.6 6.6 6.9
Blended Realisation/tonne 946.7 813.4 849.4 972.0 1006.8
mix and rising steel prices. We expect realisations
EBITDA/tonne 410.2 183.9 290.4 381.0 407.8
to remain firm across all operations in FY11E with
product prices witnessing strength on the back of Europe (Corus)
raw material cost push. EBITDA level is expected to Sales Volume 3.9 3.5 3.8 15.5 16
be maintained at Indian operations but would Realisation/tonne 975.6 1057.1 958.2 1067.9 1121.3
witness moderation at European operations due to EBITDA/tonne 93.8 -106.9 37.8 55.0 65.0
severe raw material cost push
Singapore (Natsteel)
Sales Volume 0.6 0.4 0.6 2.4 2.4
Realisation/tonne 573.7 805.0 545.9 650.0 682.5
EBITDA/tonne 19.1 -7.5 23.3 35.0 45.0

Thailand (TSTH)
Sales Volume 0.3 0.2 0.3 1.2 1.2
Realisation/tonne 592.4 440.0 581.6 650.0 650.0
EBITDA/tonne 8.8 10.0 27.2 30.0 35.0

Group Consolidated
Sales Volume 6.5 6.0 6.2 25.7 26.5
Realisation/tonne 932.9 926.3 902.5 984.7 1030.3
EBITDA/tonne 162.7 1.2 102.1 123.7 135.9

USD/INR 44.9 44.8 46.5 45.0 45.0


* Sales volume in MT, Realisation and EBITDA in US$/tonne

Source: Company, ICICIdirect.com Research

Other major developments


Debt management being pursued actively
• Tata steel India prepaid US$ 445 Mn of rupee debt and US$ 300
Mn of foreign loans in Q3 & Q4 FY10 respectively.
• Tata steel India raised US$ 634 Mn via rupee loans, US$ 479 Mn
via NCDs and US$ 46 Mn via foreign currency loans.
Raw material integration for Corus progressing well
• Construction of Stage 1 in Riversdale Benga project is slated to be
completed by H2CY11 resulting in 5.3 million ROM tonnes per
annum at full capacity
• In New Millennium Corporation project of direct shipping ore,
production of 4 MT of sinter fines is expected from Q3CY11 at a
CAPEX of C$300 million.
• Proven and probable coal reserves in Mozambique increase to
502 MT.

ICICIdirect.com | Equity Research


Page 3
Tata Steel (TISCO)

Product price Trend


Steel prices have seen some correction in the last few weeks after moving
up smartly in the first few months of CY10. HR coil prices are currently
hovering in the range of US$630-680/tonne in the global markets. Higher
raw material prices in the spot markets are providing the cost related
push and support to steel product prices.

International HR coil price is currently in the vicinity Exhibit 6: HR Coil CIS export price black sea (US$/tonne)
of US$ 650/tonne and have corrected from their
1200
recent high of US$ 715/tonne which was seen due
to raw material cost push and recovery in global
1000
demand

(In USD/tonne)
800

600

400

200

Sep-08
Mar-08

Jun-08

Dec-08

Sep-09
Mar-09

Jun-09

Dec-09

Mar-10

Jun-10
Source: Bloomberg, ICICIdirect.com Research

HR sheet prices have corrected by ~10% in the last Exhibit 7: HR Sheet price - China
two months since April
1000
900
800
(InUS$/tonne)

700
600
500
400
300
Apr-08

Apr-09

Apr-10
Feb-08

Aug-08

Feb-09

Aug-09

Feb-10
Jun-08

Oct-08

Dec-08

Jun-09

Oct-09

Dec-09

Jun-10
Source: Bloomberg, ICICIdirect.com Research

Exhibit 8: Western Europe HR coil price (US$/tonne)


1400
1200
1000
(In US$/tonne)

800
600
400
200
0
Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10
May-07

Nov-07

May-08

Nov-08

May-09

Nov-09

May-10

Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Page 4
Tata Steel (TISCO)

Outlook & Earnings Revision


The outlook for Tata steel’s Indian operations remains positive due to i)
domestic steel consumption growth outpacing production growth and
forecast of 12.1% consumption growth in CY10E by WSA recently leading
to robust domestic steel demand ii) operational cost savings in place and
iii) increasing volumes coupled with lower raw material costs due to
backward integrated structure. Company’s overseas subsidiaries in Asia
are expected to show subdued performance and Corus is expected to
show a muted performance as recovery in demand and prices in Europe
is happening at a very slow pace. Also a sharp rise in raw material
contract prices is expected to offset the increased product prices and cost
savings measures at European operations. We revise our consolidated
PAT estimate higher by 4.7% for FY12E.

We have revised our EPS estimates lower for FY11E Exhibit 9: Revised Financials (Consolidated)
to Rs 45.9 and for FY12E to Rs 61.0. Particulars (Rs Crore) FY11E FY12E
Current Previous % Change Current Previous % Change
Deliveries (MT) 25.7 27.2 -5.5 26.5 27.5 -3.6
Turnover 113915.8 123265.8 -7.6 123045.4 130357.3 -5.6
Realisation/tonne (Rs) 44311.4 45305.0 -2.2 46365.0 47336.6 -2.1
EBITDA 14304.7 14559.3 -1.7 16227.3 15887.0 2.1
EBITDA Margin (%) 12.6 11.8 13.2 12.2
EBITDA/tonne (Rs) 5564.3 5351.1 4.0 6114.7 5769.0 6.0
PAT 4067.7 4248.3 -4.3 5411.9 4248.3 27.4
EPS (Rs) 45.9 47.9 -4.3 61.0 58.3 4.7
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Page 5
Tata Steel (TISCO)

Valuations
At the CMP of Rs 484, the stock trades at consolidated FY11E PE of 7.9x
and FY11E EV/EBITDA of 5.3x. Factoring in the better-than-expected
performance and improved outlook we value the company at 5.5x
consolidated FY12E EV/EBITDA to arrive at a revised target of Rs 517 for
the stock. We expect an improvement in consolidated earnings for the
company going forward on the back of higher sales volumes, various
operational costs saving measures and product price increase
compensating for raw material cost inflation. We change our stance on
the stock and assign it an ADD rating.

Exhibit 10: EV/EBITDA Valuation


(Rs Crore) FY12E
Tata Steel Cons EBITDA 16227.3
EV/EBITDA(x) 5.5
Cons. EV 89250.4

Total EV 89250.4
Total Debt 48196.4
Cash 5654.8
Minority Interest 884.1
Market Cap 45824.75
No. of Shares (Cr) 88.7

Fair Value (Rs) 516.8


Source: Company, ICICIdirect.com Research

Exhibit 11: Global steel valuations


P/E P/BV EV/EBITDA
Company
2010 2011 2010 2011 2010 2011
Arcelor Mittal 11.8 6.9 0.7 0.6 6.4 4.7
US Steel 21.9 7.4 1.4 1.2 6.2 3.8
Nucor 27.2 11.9 1.8 1.6 9.2 5.6
Severstal 10.8 7.6 1.1 0.9 5.8 4.5
Gerdau 28.6 12.5 1.6 1.4 11.4 7.3
JFE Holdings 8.6 7.4 1.0 0.9 5.6 5.4
Nippon 10.8 8.9 1.0 0.9 6.6 6.0
Baoshan 10.4 8.5 1.0 1 5.6 4.8
Angang Steel 11.8 9.7 1.0 0.9 6.4 5.3
Average 9.0 1.2 1.0 7.0 5.3
Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Page 6
Tata Steel (TISCO)

ICICIdirect.com coverage universe (Metals & Mining)

Adhunik Metaliks Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code ADHMET CMP (Rs) 107.5 FY09 1270.3 5.1 21.0 10.2 13.3 9.1
Target (Rs) 134.0 FY10 1449.7 11.1 9.7 6.2 17.5 14.1
MCap (Rs Cr) 1327.2 Upside (%) 24.7 FY11E 1725.4 15.5 6.9 5.3 20.1 17.1
FY12E 1873.0 18.9 7.1 4.6 20.0 17.6

JSW Steel Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code JINVIJ CMP (Rs) 1,043.8 FY09 16081.5 14.7 71.0 11.4 3.5 9.3
Target (Rs) 1,192.0 FY10 19073.8 85.4 12.2 9.1 17.8 11.8
MCap (Rs Cr) 19523.3 Upside (%) 14.2 FY11E 23904.9 98.5 10.6 7.0 17.5 13.7
FY12E 31780.8 141.9 8.4 5.6 20.3 15.6
Usha Martin Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code USHBEL CMP (Rs) 80.2 FY09 2949.8 6.6 12.2 7.5 14.6 13.9
Target (Rs) 105.0 FY10 2534.4 5.5 14.5 8.6 13.5 10.4
MCap (Rs Cr) 2615.8 Upside (%) 30.9 FY11E 3644.2 10.8 7.5 5.3 21.3 16.8
FY12E 4000.5 13.0 8.1 4.3 20.9 17.8
Visa Steel Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code VISST CMP (Rs) 37.2 FY09 1035.0 -6.1 NA NA NA NA
Target (Rs) 52.0 FY10 1156.9 4.3 8.6 6.8 14.5 14.3
MCap (Rs Cr) 408.7 Upside (%) 40.0 FY11E 1460.4 6.7 5.5 5.7 18.4 11.4
FY12E 1944.5 15.4 3.4 3.8 29.6 17.8

Tata Steel - Cons Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code TISCO CMP (Rs) 484.2 FY09 145686.3 67.8 7.1 4.3 17.4 15.0
Target (Rs) 517.0 FY10 101757.8 -22.6 -21.5 10.4 -7.1 4.2
MCap (Rs Cr) 42934.0 Upside (%) 6.8 FY11E 113915.8 45.7 10.6 6.3 13.0 10.8
FY12E 123045.4 60.8 8.0 5.3 15.2 12.6

SAIL Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code SAIL CMP (Rs) 200.2 FY09 43639.7 14.9 13.4 6.2 32.7 37.4
Target (Rs) 235.0 FY10 41307.2 16.4 12.2 7.9 22.1 21.0
MCap (Rs Cr) 82670.0 Upside (%) 17.4 FY11E 49358.6 18.4 10.8 7.3 20.4 17.0
FY12E 58927.2 21.8 9.2 5.7 19.6 17.3

Sesa Goa Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code SESGOA CMP (Rs) 353.8 FY09 4959.1 25.3 14.0 9.3 42.2 51.9
Target (Rs) 524.0 FY10 5858.3 31.6 11.2 7.6 32.6 30.1
MCap (Rs Cr) 29393.1 Upside (%) 48.1 FY11E 10362.7 55.8 6.3 3.4 33.3 40.5
FY12E 11127.5 57.9 6.1 2.6 26.1 31.4

Hindustan Zinc Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code HINZIN CMP (Rs) 983.9 FY09 5680.3 64.6 15.2 11.1 20.8 19.8
Target (Rs) 1,312.0 FY10 8017.0 95.6 10.3 6.4 24.7 27.2
MCap (Rs Cr) 41572.7 Upside (%) 33.3 FY11E 9322.1 110.3 8.9 4.8 22.6 25.1
FY12E 11261.4 137.7 7.1 3.0 22.8 25.7

Sterlite Indsutries Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code STEIND CMP (Rs) 652.9 FY09 21144.2 50.0 13.1 6.2 14.8 16.4
Target (Rs) 918.0 FY10 24410.3 44.5 14.7 5.1 12.1 15.1
MCap (Rs Cr) 54869.7 Upside (%) 40.6 FY11E 28240.7 56.8 11.5 3.9 12.3 15.0
FY12E 40235.5 100.7 6.5 1.9 18.9 20.2
GPIL Sales (Rs Cr) EPS (Rs) PE (x) EV/EBITDA (x) RoNW(%) RoCE(%)
Idirect Code GODPOW CMP (Rs) 207.0 FY09 1092.0 22.8 9.1 6.6 14.6 13.6
Target (Rs) 254.0 FY10E 799.3 17.9 11.5 7.0 10.2 10.6
MCap (Rs Cr) 557.6 Upside (%) 22.7 FY11E 967.1 36.9 5.6 3.9 18.4 17.6
FY12E 1010.2 42.5 4.9 3.0 17.9 17.3
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Page 7
Tata Steel (TISCO)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Outperformer, Performer, Hold, and Underperformer. The performance horizon is two years unless specified
and the notional target price is defined as the analysts' valuation for a stock.
Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,


ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ANALYST CERTIFICATION
We /I, Pankaj Pandey MBA(FINANCE) Goutam Chakraborty MSC(ECONOMICS) Abhisar Jain MBA(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the
views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be
directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities
Inc.

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