tata steel ltd - sify
TRANSCRIPT
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TATA STEEL LTD
HOLD Target Price: Rs.615.00
CMP: Rs.535.00 Market Cap.: Rs.474764.35mn.
Date: February 15, 2010
Key Ratios:
Particulars FY09 FY10E FY11E
OPM (%) 38.83 35.14 35.93
NPM (%) 21.39 16.46 16.87
ROE (%) 21.06 13.90 13.54
ROCE (%) 16.40 12.98 13.10
P/BV(x) 1.58 1.64 1.42
P/E(x) 7.52 11.83 10.50
EV/EBDITA(x) 4.14 5.54 4.93
Debt Equity Ratio 1.09 1.64 1.42
Key Data:
Sector Steel Industry
Face Value Rs.10.00
52 wk. High/Low (Rs.) 661.70/148.65
Volume (2 wk. Avg.) 2423000
BSE Code 500470
SYNOPSIS
• Tata Steel is the world’s 5th largest steel company,
Asia’s first integrated steel company is now the
world’s second most geographically diversified
steel producer, with operations in 27countries and
commercial presence in over 50 countries.
• Tata Steel board approved a framework for co-
operation between Tata Steel Ltd and Nippon
Steel Corporation for the production and sales of
automotive cold-rolled flat products at
Jamshedpur.
• During the quarter company has entered into a
memorandum of understanding (MoU) with
National Mining Development Corporation
(NMDC).
• Tata Steel`s European unit Corus to invest 35 mn
euros in French steel mill.
• Tata Steel enters into Joint Venture Agreement
with New Millennium, Canada.
• TATA Steel and MMTC Ltd signed an agreement to
launch a 74:26 joint venture company.
• Net sales of the company are expected to grow at
a CAGR of 11% over 2008 to 2011E.
Share Holding Pattern:
V.S.R. Sastry
Vice President
Equity Research Desk
91-22-25276077
Dr. V.V.L.N. Sastry Ph.D.
Chief Research Officer
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Table of Content
Investment Highlights ............................................................................................................ 3
Peer Group comparison………………………………………………………………………………………………….….….6
Keyconcern………………………………………………………………………………………………………………….…………6
Financials……………………………………………………………………………………………………………………………….6
Charts………………………………………………………………………………………………………………………….………...7
Outlook and conclusions……………………………………………………………………………………………………....10
Industry Overview…….…………………….……………………………………………………………….………….…….. .11
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Investment Highlights
Q3 FY10 Results Update
Tata Steel, India`s largest integrated private sector steel company disclosed results for the
quarter ended Dec. 31, 2009. The company, which acquired Europe`s second-largest
steelmaker Corus in 2007, reported standalone net profit increased 155.61% to
Rs.11917.50 million for the third quarter, from Rs.4662.40 million in the corresponding
quarter of last year. Net sales increased to Rs.63748.80 million from Rs.48021.40 million,
an increase of 32.75%. Total Income has also increased 38% to Rs.66384.40 million for the
quarter ended Dec. 31, 2009 from Rs.48106.30 million in the corresponding quarter of last
year. Company reported earnings of Rs 13.43 a share, registering a raise of 110.49%.
Quarterly Results - standalone (RS in mn)
As At Dec-09 Dec-08 %change
Net sales 63748.80 48021.40 32.75
PAT 11917.50 4662.40 155.61
Basic EPS 13.43 6.38 110.49
Net Sales & Net Profit Growth
The standalone sales for the quarter rose by 32.75 per cent to Rs 63748.80 million
compared to the same period a year ago & standalone profit after tax of Rs 11917.50
million, a growth of 155.61 per cent for the third quarter ended December 31, 2009
compared to the corresponding quarter last year.
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EPS Growth
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Joint venture with Nippon Steel
Tata Steel board approved a framework for co-operation between Tata Steel (TSL) and
Nippon Steel Corporation (NSC) for the production and sales of automotive cold rolled flat
products at Jamshedpur to address the localization needs of Indian automotive customers
for high grade cold rolled steel sheet and contribute to further expansion of the India
automobile industry.
Signs MoU for mutual benefits
Tata Steel has entered into a memorandum of understanding (MoU) with National Mining
Development Corporation (NMDC). The MoU is aimed to explore the possibility of
acquisition, exploration and development of mines, extraction and processing of minerals,
setting up integrated steel plants and other businesses of mutual interest.
To invest 35 mn euros in French steel mill
Tata Steel European unit Corus would invest Euro 35 million at its rail production facility in
Hayange in France after securing major contract from French operator SNCF. Corus
has secured a Euro 350 million contract to supply rail tracks to SNCF. The contract is for an
initial four years with an option to extend it by a further two years.
Enters into Joint Venture Agreement with New Millennium
Tata Steel has entered into a joint venture (JV) agreement with Canada-based New
Millennium Capital Corp (NML) and LabMag for development of the Direct Shipment Ore
(DSO) project in Canada. Tata Steel will make its investment decision for the said project
within 180 days from the delivery of feasibility study which is currently under process. The
agreement envisages formation of a JV Company upon closing of the transaction
subsequent to a notice of JV investment being delivered to NML by Tata Steel. Tata Steel
will hold 80% stake in the JV Company while 20% will be with NML. The Tata Group
Company will also fund 100% of the project cost of up to C$300 million.
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Tata Steel launches exchange offer for CARS
The Board of Tata Steel Ltd has authorized the committee of the board to consider and
approve an exchange offer of new foreign currency convertible bonds for any or all of the
existing US$75,000,000 convertible alternative reference securities due 2012.
Tata Steel and MMTC Form JV
Tata Steel Limited, one of the world`s largest produces iron and MMTC Ltd signed an
agreement to launch a 74:26 joint venture company. It was formed for acquisition,
development and operation of mines and processing of minerals and metals. MMTC and
Tata Steel have agreed to co-operate with each other and are executing this agreement
for setting up a joint venture for the above purpose.
Peer Group Comparison
Name of the company CMP(Rs. )
Market
Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend(%)
TATA Steel Ltd 535.00 474764.35 48.96 10.99 1.58 160.00
SAIL 202.65 837025.7 14.87 13.63 2.99 26.00
Jindal Steel & Power 634.20 590588.7 13.85 45.79 10.90 550.00
JSW Steel 1011.15 189134.3 72.44 13.96 2.48 10.00
Key Concerns
Consumption of steel is going up by 8-10 million tonnes per annum. This will continue
for several years. Then, we have to import 25 million tonnes of steel in the next five
years.
The extensive involvement of the government to keep price stable, the industrial
margins are going into the pressure.
The ongoing credit crisis and slowing demand from global markets has forced
companies across sector to postpone expansion plans.
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Financials Results
12 Months Ended Profit & Loss Account (Standalone)
Value(Rs. in million) FY08A FY09A FY10E FY11E
12m 12m 12m 12m
Description
Net Sales 196932.80 243157.70 243761.64 268137.80
Other Income 3350.00 3082.70 4696.05 5165.66
Total Income 200282.80 246240.40 248457.69 273303.46
Expenditure -112486.10 -151823.40 -162789.82 -176970.95
Operating Profit 87796.70 94417.00 85667.87 96332.51
Interest -8787.00 -11526.90 -15822.29 -17404.52
Gross Profit 79009.70 82890.10 69845.58 78927.99
Depreciation -8346.10 -9734.00 -10391.44 -11430.58
Profit before Tax 70663.60 73156.10 59454.15 67497.41
Tax -23793.30 -21138.70 -19322.89 -22274.15
Profit after Tax 46870.30 52017.40 40131.26 45223.27
Equity Capital 7307.80 7307.90 8874.10 8874.10
Reserves 210974.30 239728.10 279859.36 325082.63
Face Value 10.00 10.00 10.00 10.00
Total No. of Shares 730.78 730.79 887.41 887.41
EPS 64.14 71.18 45.22 50.96
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Quarterly Ended Profit & Loss Account (Standalone)
Value(Rs. in million) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E
3m 3m 3m 3m
Description
Net Sales 56155.50 56921.10 63748.80 66936.24
Other Income 463.40 760.50 2635.60 836.55
Total Income 56618.90 57681.60 66384.40 67772.79
Expenditure -38733.30 -37698.80 -42179.80 -44177.92
Operating Profit 17885.60 19982.80 24204.60 23594.87
Interest -3421.60 -3920.00 -4157.20 -4323.49
Gross Profit 14464.00 16062.80 20047.40 19271.38
Depreciation -2531.70 -2563.70 -2621.80 -2674.24
Profit before Tax 11932.30 13499.10 17425.60 16597.15
Tax -4034.00 -4469.70 -5508.10 -5311.09
Profit after Tax 7898.30 9029.40 11917.50 11286.06
Equity Capital 7307.90 8874.10 8874.10 8874.10
Face Value 10.00 10.00 10.00 10.00
Total No. of Shares 730.79 887.41 887.41 887.41
EPS 10.81 10.18 13.43 12.72
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Charts:
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1 Year Comparative Graph
Outlook and Conclusion
At the current market price of Rs.535.00, the stock is trading at 11.83 x FY10E and
10.50 x FY11E respectively.
The EPS of the stock is expected to be at Rs.45.22 and Rs.50.96 for FY10E and FY11E
respectively. The equity capital of the company is changed to 8874.10 million from
7307.90 million.
Price to Book Value of the stock is expected to be at 1.64 x and 1.42 x respectively
for FY10E and FY11E.
Tata Steel has entered into a memorandum of understanding (MoU) with National
Mining Development Corporation (NMDC).
Tata Steel European unit Corus would invest Euro 35 million at its rail production
facility in Hayange in France after securing major contract from French operator
SNCF.
Tata Steel has entered into a joint venture (JV) agreement with Canada-based New
Millennium Capital Corp (NML) and LabMag for development of the Direct Shipment
Ore (DSO) project in Canada.
TATA STEEL BSE SENSEX
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Tata Steel Limited, one of the world`s largest produces iron and MMTC Ltd signed an
agreement to launch a 74:26 joint venture company.
Net Sales of the company are expected to grow at a CAGR of 11% over 2008 to
2011E.
On the basis of EV/EBITDA, the stock trades at 5.2 x for FY10E and 4.82 x for FY11E.
We recommend ‘Hold’ in this particular scrip with a target price of Rs.615.00.
Industry Overview
The steel industry, in general, is on the upswing, due to strong growth in demand propelled
particularly by the demand for steel in China. The world scenario coupled with strong
domestic demand has benefited the Indian steel Industry. Demand for steel in India has
grown at a healthy rate of 12-13 per cent in the last 2-3 years. Strong GDP growth, real estate
and construction boom have been the main drivers of this demand.
India is one of the largest producers of steel in the world. The steel industry currently
accounts for over Rs. 900 billion in capital investment and employs almost 0.5 million people
in India. Government-owned companies, including SAIL, own large integrated steel plants and
have a dominant market share.
Impact of global crisis on Six Core Industries
The impact of the global meltdown and credit crisis is increasingly being felt across the globe,
and India is no exception, although the severity of the same is likely to be lower in our case
than in many other countries. The impact of global economic slowdown is being felt by the
infrastructure industries in India. The growth of six core industries in the first half of the
current fiscal (April-Sep 2008-09) declined to 3.9 per cent from 6.9 per cent during the same
period in the pervious year.
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Sector Updates
SAIL may defer finalizing expansion plan of increasing its production capacity from 15mtpa to
over 26mtpa, it plans to approach market for borrowing 50 per cent of its Rs. 540bn
expansion plan. The company is likely to cut down production from its steel unit at Rourkela
JSW Steel lays foundation for a Rs. 350bn, 10mn ton steel project in west Bengal and are
trying to cut their output by 20 per cent in November month. The company tied up with UK-
based Sever field-Rowen to float an equal-stake joint venture company for manufacturing
construction steel and Toshiba – JSW to set up a plant to manufacture super critical power
boilers. They cut the prices of HR Coils by Rs5, 500 per tone and expecting 10-12% growth in
sales in FY09.
Tata Steel aims to double its return on capital in the next four years via improving process at
the European factories. The company starts work on new blast furnace for 10mn tonne
capacity at Jamshedpur works and they try to push back capex plans and green field units at
Jharkhand and Chhattisgarh. They also continue with its Rs. 270bn plan to expand capacity at
Jamshedpur and build a new plant in Orissa. Even they are also not having any plans to cut
production.
Six Core Industries - Production
Coal 7.9 per cent Vs 2.8 Per cent
Crude Oil -0.8 Per cent Vs 0.7 Per cent
Petroleum Refinery 4.5 Per cent Vs 9.8 Per cent
Electricity 2.6 Per cent Vs 7.6 Per cent
Cement 6.0 Per cent Vs 8.7 Per cent
Finished Steel 5.3 Per cent Vs 7.7 Per cent
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Jindal Steel & Power aims to add hydroelectric, nuclear, wind and solar projects to its larger
steel business. They want to maintain steel production and not to cut output by going ahead
with capex plans.
Reliance Infra to enter steel plant construction biz The Anil Ambani-controlled Reliance
Infrastructure is set to expand its engineering and construction business in India by getting
into construction of steel plants through a Chinese tie-up.
Steel Hot Commodity in India
India's steel industry is surging ahead, entering into global deals and taking the country's
economy to new heights. The Indian government plans to invest over US$ 350 billion in steel
industries related to infrastructure and construction. The Indian government estimates that
steel production would grow at a CAGR of 16 per cent to touch 124.06 MT by 2011-12. India's
steel production capacity is estimated to be 200 MT by 2020. The Indian government
estimates that steel production would grow at a CAGR of 16 per cent to touch 124.06 MT by
2011-12. India's steel production capacity is estimated to be 200 MT by 2020.
Iron ore price negotiations - Big cut expected in 2009
It is reported that big iron ore miners expect pressure from the world steelmakers for
significant price cuts of 20% to 40% less than 2008 levels when supply contract negotiations
open. The Wall Street Journal also reported that Vale, BHP Billiton and Rio Tinto are girding
for price cut proposals when the 2009 contracts are signed next spring. That would be a sharp
reversal from 2008, which had seen spot prices more than triple to USD 200 per tonne before
the recent slide back to USD 70. Vale of Brazil, already has withdrawn a mid contract hike of
12% proposed earlier to Chinese steelmakers.
With demand for autos, construction infrastructure and appliances weakening, steelmaking is
being throttled down globally. Vale also has announced it will slash iron ore production by
10% of capacity or 30 million tonnes in the last two months due to the impact on steelmaking
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from the worldwide financial crisis and slackened economic growth. Vale also indicated in a
statement that so far in 2008, they already shipped 320 million tonnes of iron ore, but the
total will plunge by about 20% from 2007. Rio Tinto, another global supplier, and Cliffs
Resources in the US also are reducing production at some of mines and idling pellet-making
facilities.
Govt slaps customs duty on steel
The recent fall in the international prices of commodities government view to safeguard the
interests of domestic producer, carried out certain changes in the customs duty rates. They
decided to withdraw the full exemption from customs duty granted earlier on specified iron
and steel items such as pig iron, spiegeleisen, semi-finished products, flat products and long
products. Consequently, they will be subject to a basic customs duty of 5% ad valorem.
Steel majors to gain from 4 per cent duty cut
The construction grade steel like TMT and structural made by Steel Authority of India Ltd,
Rashtriya Ispat Nigam Ltd and Tata Steel will benefit from the government’s move to across-
the-board cut of 4% in the ad valorem Cenvat rate, which will be effected for the balance part
of the current fiscal on all products other than petroleum. For the iron ore producers, the
major sop is the elimination of 8% export duty on export of fines and reducing the current
15% ad valorem export duty on lumps to 5%. Since 86% of iron ore export consists of fines,
the move comes as a major relief for the producers. The iron ore producers now expect that
exports in the current fiscal would be around last fiscal’s level of 104 million tonne. Earlier,
the estimate was of around 80-85 mt.
Steel products currently attract an excise duty of 14%, which would now go down to 10%.
Since most products are modvatable—where excise refund is given to manufacturers for
value addition, the benefit would be restricted to long products like TMT and structural steel,
which are used in the construction sector and are currently not modvatable.
TMT and structural steel is manufactured by state-owned steel companies like Steel Authority
of India Ltd and Rashtriya ispat Nigam Ltd and the largest private sector steel producer, Tata
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Steel. It is expected that prices of these two products would come down, which is currently in
the region of Rs 28,000-30,000 per tonne. The reduction of prices of these two products
would benefit the real estate sector, where steel is a significant cost component.
Duty cut fails to impress iron ore exporters
The government's decision to cut export duty on iron ore -- to zero on fines and to five per
cent on lumps -- has brought some relief for miners as the move is expected to give the much-
needed boost to the industry reeling under the pressure of low demand and fall in prices.
Export of iron ore fines in November was lower by 50 per cent over the same period last year.
During the April-November period, it was 16 per cent lower. Iron ore prices had dropped
significantly in the past few months. Prices of iron ore fines had come down from $145 a
tonne to $50 a tonne over the period, the duty restructuring would not have any impact on
prices in the immediate term but would make projects more viable. However, if the demand
picks up in China on the back of the package announced by its government, it could drive
prices up from the current levels.
________________ ____ _________________________
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